Reducing Your Car Payment in Bankruptcy

If you’re struggling with debt, especially a high car loan payment, bankruptcy may be a good option for you. Bankruptcy can discharge your debts to give you a fresh start or restructure your existing debts into affordable payments with a three- to five-year payment plan. When you’re struggling with a steep car loan payment, bankruptcy can offer another benefit: the ability to lower your car payment.

There are two main types of bankruptcy for consumers in California:
— A Chapter 7 bankruptcy. Also called a liquidation bankruptcy, a Chapter 7 will discharge most of your debt to give you a fresh start. The bankruptcy trustee will try to sell any significant nonexempt assets you have to pay your creditors.
— A Chapter 13 bankruptcy. Also called a reorganization bankruptcy, a Chapter 13 restructures your debt so you can repay some of your debt over a period of 3-5 years.

If you choose a Chapter 7 bankruptcy and want to keep your car, the car loan will not be discharged in your bankruptcy because it’s a secured debt, not unsecured like credit card debt. Your secured creditor holding the car loan will require that you sign a reaffirmation agreement to waive discharge of the debt and retain your car. You will need to keep up with your monthly payments as your creditor can still repossess the car if you default.

There is an option in a Chapter 7 bankruptcy to decrease your balance: redeeming your car. When you redeem your car, you are paying the replacement value of the car which is likely significantly lower than the amount you owe. The only problem with this option is you must pay the replacement value as a lump sum. Many people filing for bankruptcy do not have this much money in cash to redeem a car.

A Chapter 13 bankruptcy offers the best chance to lower your car payment and keep your car. With a Chapter 13, your car loan becomes part of your 3- or 5-year repayment plan. While it’s possible your car payment will stay the same, you can get a high interest rate reduced to a very reasonable rate that’s usually around 4% and usually only available to borrowers with excellent credit. You can also reduce the principal balance of the loan if the value of your car is less than what you owe and you bought the vehicle at least 910 days before you filed for bankruptcy. This strategy is known as an auto cram down which reduces the balance you owe to the vehicle’s fair market value. Most people who have a car loan can qualify for a cram down or interest rate reduction in Chapter 13 bankruptcy.

If you’re considering filing for bankruptcy, have a car loan, and want to keep the car, it’s essential to work with an experienced Los Angeles bankruptcy lawyer to review your options and help you choose a strategy that will give you an affordable payment for a better financial future.