How does bankruptcy help me keep my car?

Edgardo Veguilla-González, Esq.

A person with a financed car may fall behind on his payments and find himself in a situation where the creditor who borrowed the money for the vehicle attempts to repossess it.

In a bankruptcy, there are several ways a debtor can cure these arrears and keep his vehicle, as explained below:

1. Pay off arrears through bankruptcy

Under this alternative, the debtor may file for Chapter 13 bankruptcy; as part of his payment plan, he can arrange to pay off any existing arrears on his car loan. For instance, if a debtor fell behind on payments due on January 1st, February 1st, and March 1st, and files for bankruptcy on March 25th, he could pay off these three months as part of his bankruptcy plan. This grants him additional time—up to five years—to cure these arrears. Regarding current payments—specifically the payment due on April 1st and all subsequent payments—the debtor may continue to make these payments directly to the creditor. Upon receiving these current payments, the creditor is obligated to credit them to the corresponding months and may not apply them towards the months that were in arrears before the bankruptcy.

2. Pay off the entire debt through bankruptcy.

Under this alternative, the debtor may choose to pay not only the arrears but the entire principal balance through a Chapter 13 plan. This means that instead of having to keep making high payments, the debtor can extend the term of the original contract (for up to five years), thereby reducing the monthly payment amount.

3. Pay the value of the vehicle only.

Under certain circumstances—provided specific requirements are met—a debtor may propose, within his Chapter 13 payment plan, to pay the creditor the vehicle's market value at the time of filing, rather than the outstanding debt balance. This alternative makes sense given that vehicles typically depreciate rapidly; consequently, the vast majority of vehicles are worth significantly less than the amount still owed to the creditor.

In addition to these alternatives, a Chapter 13 case can be useful even for recovering a vehicle that was recently repossessed by the creditor. Once the bankruptcy petition is filed, if the vehicle has not yet been sold at auction, the creditor is obligated to return it to the debtor so that the debtor may cure any arrears through their payment plan.

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