Chapter 13 Car Loan: Getting and Maintaining Your Auto Loan

Anyone who has experienced a Chapter 13 bankruptcy knows how challenging it can be, considering its lengthy duration. But what happens when you need a car during that time? The task of making a significant purchase like a vehicle can feel daunting, especially when dealing with bankruptcy. However, at Simple Money Tips – Steps to Financial Freedom, we are here to guide you through the process and provide the assistance you need.

Open Chapter 7 vs. Open Chapter 13

For those unfamiliar, there are two major differences between Chapter 7 and Chapter 13 bankruptcy. Chapter 7 clears your debt instantly, but it leaves a mark on your credit report for ten years. An auto loan will only be considered after completing Chapter 7 bankruptcy and obtaining your 341 papers.

On the other hand, Chapter 13 involves making monthly payments over a set period to repay your debt. Although it can take three to five years, Chapter 13 only stays on your record for about seven years, including the repayment period. This means you have options to acquire new debt during Chapter 13 that are not available with Chapter 7.

Because of the open repayment period with Chapter 13, there may be unavoidable needs that arise. When it comes to acquiring a better vehicle, there are dealerships out there that can assist you.

Getting an Auto Loan with an Open Chapter 13

In a bankruptcy, it is possible that your current vehicle may have been repossessed by the lender. If that’s the case, you need a car now to commute to work, run errands, visit doctors, and fulfill other essential responsibilities.

Not every dealer is prepared or willing to help you replace your vehicle. That’s where we step in. At Simple Money Tips – Steps to Financial Freedom, finding dealerships that work with bankruptcy cases only takes about three minutes. Our quick and painless auto finance application is all it takes.

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Once you’ve completed the application, we will contact you to verify your information and schedule a meeting with one of our dealers in your area.

During the meeting, you’ll need to bring the following documents:

  • Your account trustee’s approval
  • Proof of income
  • ID

Together with the dealer, you’ll determine how much you can afford to ensure you don’t go back into debt. They’ll assist you in finding a vehicle that offers the most value at the lowest cost. Opting for a used vehicle that is only a few years behind the current model can help you get more for your money.

What Can Chapter 13 Do for Your Auto Loan?

Filing for Chapter 13 bankruptcy can benefit your car loan in various ways, depending on your situation. Since Chapter 13 bankruptcy lasts three to five years, there are processes in place to help you maintain your current auto loan or obtain a new one if unexpected circumstances arise.

Chapter 13 bankruptcy can be particularly helpful if you are behind on your car loan payments or owe more than the vehicle’s worth. In such situations, Chapter 13 can assist in managing your financial situation and keeping your car.

Keeping Your Auto Loan in Chapter 13

When you file for bankruptcy, an automatic stay is imposed, halting all collection attempts until the bankruptcy details are resolved. Chapter 13 is known as a repayment bankruptcy, where the court assigns a trustee to manage your finances. The trustee develops a budget and a repayment plan that you must adhere to. Since you’re given time to pay your creditors, you typically get to keep property such as a reasonably-priced vehicle.

While the automatic stay is in effect, your trustee can evaluate your auto loan situation and guide you on the best course of action. If you intend to keep your car loan or lease, you generally have two options, depending on your vehicle’s equity and payment status:

  1. Catch up on your auto loan through your repayment plan: If you were facing repossession due to late or missed payments when you filed for bankruptcy, you have the opportunity to add those missed payments to your bankruptcy repayment plan. This allows you to bring your loan current and prevent repossession. To ensure a successful outcome, you must stay current on both your loan and repayment plan. If you miss another payment, even after your bankruptcy is discharged, the lender has the right to repossess the vehicle.
  2. Cramdown negative equity: If you owe more on your loan than the car is worth, you’re in a negative equity position. In such cases, you may be able to cramdown your auto loan and pay only the fair market value of the vehicle. The remaining negative equity is added to your unsecured debts and may be wiped out upon successfully completing your Chapter 13 bankruptcy. Cramdowns are only available in this chapter, and you must have owned your car for at least 910 days (two and a half years) before filing for bankruptcy.
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When You Can’t Keep Your Car in Chapter 13

If your auto loan is not eligible for cramdown in Chapter 13 or you prefer not to add the payments to your repayment plan, you have the option to voluntarily surrender your vehicle. If you believe you cannot keep up with both your car loan and repayment plan, voluntarily surrendering the car may be a better alternative to waiting for the lender to send out a tow company.

By surrendering the car yourself, you’ll be responsible for paying any remaining loan amount after the vehicle is sold, known as a deficiency balance. Surrendering the car voluntarily may ultimately be less expensive since you’ll avoid the costs associated with repossession, such as storage and recovery fees.

Getting a More Affordable Car Loan During Chapter 13

Given that Chapter 13 bankruptcy can last for three to five years, there is a policy in place that allows you to obtain a car loan while undergoing bankruptcy. This is particularly helpful when you can’t afford to keep your current vehicle as you enter Chapter 13. If you surrender your car and find yourself in need of transportation, it’s typically possible to secure a bankruptcy auto loan.

The process begins with finding a lender that specializes in working with borrowers facing bankruptcy or other financial challenges. These are often subprime lenders who collaborate with special finance dealerships.

Once you locate a subprime lender, you’ll need to obtain a sample buyer’s order from the dealer. This document outlines all the contract terms, including the highest interest rate you may qualify for, and includes the phrase “or similar” next to the make and model of the chosen vehicle. This allows you to proceed without starting over if the specific car on the buyer’s order has already been sold.

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If your trustee approves of the sample contract and recognizes your need for a car, they will file a Motion to Incur Debt with the court. Once it’s approved, you’ll receive an Order to Incur Debt, enabling you to return to the same dealership and complete your auto loan paperwork.

Finding a Bankruptcy Auto Loan

If you’re searching for a dealership with the resources to provide bankruptcy auto loans, look no further. Simple Money Tips – Steps to Financial Freedom has been connecting bankruptcy borrowers with local dealerships that are ready to help them secure a vehicle for over 20 years. Our fast and free process comes with no obligation. Simply fill out our auto loan request form, and we’ll match you with a dealer experienced in handling bankruptcy car loans.

Remember, bankruptcy is not the end but a chance for a fresh start. At Simple Money Tips – Steps to Financial Freedom, we are committed to helping you navigate the path to financial freedom.