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Reducing Car Payments in Chapter 13 Bankruptcy

Most consumer debtors (debtors who have debts from normal consumer activities like credit cards, medical debts, mortgages, etc.) have to decide between filing a chapter 7 or chapter 13 bankruptcy. Many of our clients come in for the first time and tell us “I want to file for chapter 7.” Most of them have received most of their bankruptcy information from friends and relatives instead of a bankruptcy attorney.

There are many reasons to file chapter 7 bankruptcy and chapter 7 works well for many people. But if you have are paying for an older car or a car that was bought more than 2 1/2 years ago, chapter 13 may work better for you.

If a debtor wants to keep a car in a chapter 7 bankruptcy, the options are limited. In most cases the debtor will have to be current on the car payments and sign a reaffirmation agreement with the car company. A reaffirmation agreement is a document that makes it like the bankruptcy never it happened to the creditor. If a payment is missed on a car after a reaffirmation agreement is signed, the car can be repossessed and the debtor can be sued for the deficiency. It happens more than you can imagine.

Chapter 13 bankruptcy allows a debtor to pay a payment to the bankruptcy court in order to keep certain assets, like cars or houses. The bankruptcy payment is made to the court for at least 3 years and can last up to 5 years if need be. If all payments are made to the court, debts that are allowed to be discharged are wiped out at the end of the case and all of the debtor’s assets are safe.

There is a special provision in the chapter 13 law that allows a debtor to pay the court for a car and if the car was bought more than 2 1/2 years ago (910 days to be exact), the debtor only pays the value of the car, not what is owed on the car. That can make a huge difference for many debtors that had bad credit and were forced by a car dealer to pay more than a car was worth at the time of purchase or for those debtors who may have a huge car note balance because of a prior trade in on their current car where the trade had a large balance that was rolled over into the new car note.

The decision between filing chapter 7 and chapter 13 is always a tough one. Be sure not to make up your mind on all of that great “legal advice” from friends and family. Speak with a bankruptcy attorney about your choices to get the full picture before you decide.