A Chapter 13 bankruptcy is a long process – either three or five years – where you’re responsible for paying off your debts with your disposable income. In a Chapter 13, you’re likely to be able to keep your vehicle, but there are exceptions to this general rule:
- If your car payment is too expensive – say, for a luxury vehicle – the court might not allow you to use the payment when calculating your disposable income. You’re only allowed to keep reasonably necessary living expenses, and a large payment could seem unreasonable, affecting your repayment schedule. Another thing that might harm your repayments is too much equity in your car.
- If you’re already upside down, you might consider a loan cramdown if you plan to file. During a Chapter 13 bankruptcy, this tactic allows you to reduce the amount you owe on a car loan to match the actual cash value of the vehicle. Anything left over gets added to your other unsecured debts. However, you have to have purchased your car at least 910 days (two and a half years) before filing.
- If you’re behind on your car payments, it typically means repossession, but an “automatic stay” goes into place as soon as you file bankruptcy. This prohibits most creditors from collecting further payments. A Chapter 13 bankruptcy doesn’t always mean you automatically get to keep your car. However, if you pay the amount you’re behind, and keep up with your remaining car payments, you should be safe.
Buying a Car During Chapter 13 BK
The first step in getting auto financing during a Chapter 13 bankruptcy is finding a lender who can work with you. Because not all lenders work with people in this situation, you’ll typically need a special finance dealer with subprime lending resources.
Once you’ve found one, get a sample buyer’s order along with a financing statement to bring to your trustee. These need to include all the specifics about your potential loan: the down payment, amount to finance, monthly payment, loan term, interest rate, vehicle information, etc. It’s very important to make sure the dealer includes “or similar” with your vehicle information.
Because your trustee will have to review the paperwork and take it to the court for approval with a “motion to incur debt,” the process takes time. Without the “or similar” stipulation on your paperwork, you might have to start from scratch if the vehicle you plan to buy has been sold.
The court can approve or deny your motion, depending on why you need the car and how a new payment affects your repayment plan. You might be required to attend a hearing during this process, but once you’re approved, you can return to the dealer and continue the financing process.