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Keeping Your Car in a Chapter 13 Bankruptcy

A chapter 13 is designed to help an individual keep their car in the event of a financing default. If a car is repossessed prior to the filing, the creditor must return the vehicle, immediately upon the bankruptcy filing. However, in New Jersey bankruptcy law, the debtor must provide the finance company with proof of adequate car insurance, that includes the finance company as a lien holder or loss payee. Typically, the car is returned within two (2) days of the filing.

A debtor may always surrender any vehicle to the finance company. Typically, the finance company will sell the vehicle at wholesale value and file an unsecured claim with the court for the deficiency. The deficiency is the balance due to the finance company after deducting the sale’s proceeds. The determination as to how much, if any, the debtor is required to pay the finance company is based on the entire financial position of the debtor. This information deals with unsecured claims, which is explained in separate portion of this site. Typically, the debtor would pay either none or a small portion of the balance.

If at the time of the filing, the debtor is behind with their finance payments, they may keep the car by making the future monthly finance payments, with the pre-filing arrears paid through the monthly trustee payments. In New Jersey, the future monthly finance payments are paid directly to the finance company. The arrears, including any costs, are paid through their monthly trustee payments, by dividing the total arrears by the number of months of the plan.

An individual who owns a financed vehicle may be able to keep the car by paying to the finance company the retail value of the car, plus a fair rate of interest, without having to pay the entire loan payoff. This is called a “cramdown”. This entire amount (car. value, plus interest) is paid through the bankruptcy trustee payments, by divided the total balance by the number of plan payments. This is possible whether or not the debtor is in default with the payments. Typically, this may be accomplished, if the car was purchased and financed 910 days prior to the bankruptcy filing. The amount paid is based on the retail value of the vehicle at the time of the bankruptcy filing. The value may be based on the N.A.D.A. figures or an appraisal. The amount of the interest rate that is added to the value is based on a complicated analysis. However, generally the interest rate is less than the original contract rate of interest.

In the cramdown scenario, the finance company may not be paid by the monthly trustee disbursements until after other creditors are paid. This will result in the debtor having use of the car without making monthly payments. As a result, the finance company is entitled to be paid monthly “adequate protection” payments. Monthly adequate protection payments, typically, represent the amount of the car’s monthly depreciation. Adequate protection payments commence at or about the time of the filing and continue until the trustee commences making the regular payments to the finance company. Please note that the adequate protection payments are credited to the total amount that is due to the finance company.

A debtor may wish to payoff the financing through the monthly bankruptcy plan payments, instead of making the monthly payments directly to the finance company. This may be accomplished whether the debtor is current or in default with the payments. Again, the debtor must pay interest on the payoff balance. The balance, plus interest, is divided by the number of months of the bankruptcy plan. The creditor may be entitled to adequate protection payments.

A debtor who is current with their monthly finance payments may continue with the monthly payments, without any effects of the bankruptcy filing.

Lease Cars

A debtor may surrender a leased car, in any scenario. Any amount due to the car lease company, after the surrender, may be paid based on the same criteria explained above with regard to a financed vehicle. The amount due to the lease company is deemed general unsecured debt.

Similar to a financed vehicle, a repossessed leased car must be returned to the debtor, immediately upon the filing of the bankruptcy petition. The debtor must provide proof of adequate insurance that includes the creditor as a lien holder or loss payee.

A debtor may not “cramdown” a leased car. Typically, if the debtor is behind with pre-filing leased payments, the debtor will cure the arrears through the bankruptcy plan, while making monthly lease payments directly to the lease company. The trustee will make monthly disbursements to the lease company, representing the amount due on the arrears. The arrears must be paid “promptly” under the bankruptcy code. Typically, the trustee’s disbursements must be paid prior to the lease termination.

Similar to financing, a debtor who is current with their monthly finance payments may continue with the monthly payments, without any effects of the bankruptcy filing