If your car is about to be repossessed because you’ve fallen behind on your payments, a Chapter 13 bankruptcy can help you keep your vehicle. The moment you file for bankruptcy, what’s known as an automatic stay goes into effect, stopping all creditors from taking actions against you to collect their debts. This includes repossession. At this point, you’ll have two options. You can either allow the repossession to take place and relieve yourself of the liability of paying for your car or you can choose to keep it by paying the lender the amount you owe. If you choose to keep your car, you’ll be able to use a Chapter 13 repayment plan to refinance your car loan, usually to an affordable monthly amount much lower than your normal car payment. You may also be able to pay less than what you currently owe on the car loan because your lender in a bankruptcy is only entitled to recover the current value of your vehicle, not the amount that’s owed on the original loan. Therefore, if you owe $10,000 (ten thousand dollars) on your car loan, but your car has a market value of actually $5000 (five thousand dollars) at the time of your filing, you’ll be responsible for paying the lower amount during your bankruptcy. The remaining balance on the loan is considered unsecured and usually isn’t paid at all since it’s given the lowest priority on the payment hierarchy. This is commonly known as “cramming down” or “lien stripping”. Keep in mind that no bankruptcy, regardless of the chapter you file, allows you to keep property that's used as security for a loan without you making payments on the loan. So if your car was pledged as collateral for a loan, you can’t keep it if you don’t make your payments. Failure to make payments can lead to your car loan creditor proceeding with repossession once the automatic stay is lifted or your bankruptcy is over.
