Restructure Your Secured Debts with Chapter 13

The most common consumer secured debts other than mortgages are loans for car purchases, electronics purchases, and furniture purchases.

While a chapter 7 bankruptcy will release you from the obligation of paying for these debts, it will not protect the property securing the loan (the collateral) from repossession unless the debt is reaffirmed and the loan is current. Therefore, if you are behind on secured loans when filing chapter 7 bankruptcy and cannot immediately cure the default, the creditor will retain the right to repossess and sell the property to recover at least a portion of the unpaid balance. This is so even if you will not be personally liable for any deficiency.

Chapter 13, however, is designed to help you protect your property. Accordingly, you can use the provisions of the chapter 13 to force secured creditors to restructure the loan terms and balances in ways not normally possible outside of bankruptcy so you can catch up on payments and keep your property.

These important provisions are discussed below:

Stop Repossession or Get Your Car Back

Filing a consumer bankruptcy case immediately stops any and all creditor collection efforts - even repossession, of any personal property. This includes cars, furniture, electronics, etc.. In Chicago bankruptcy court, it is also possible to get your car back after it has already been repossessed. Although to avoid the substantial costs of repossession that can make curing any default even more difficult than it already is, it's best to file your case before the actual repossession.

Once the chapter 13 is filed, the creditor must seek permission from the bankruptcy judge to continue with the repossession, or else face sanctions. If you propose to pay the car loan (or any other secured loan such as a furnitre loan, etc.) in full over the 3 to 5 year period of your chapter 13 plan, and you make timely plan payments, the judge generally will not grant the creditor permission.

To increase your chances of success, chapter 13 immediately stops late fees and penalties from accruing, and allows you to force the creditor to accept a low interest rate on the loan balance. Today, the rate can be as low as 3.25%.

You can also use the chapter 13 to reduce ("cramdown") a secured loan balance to the fair market value of the property (the collateral) securing the loan. (See cramdown in the panel below.) For example, if you owe $10,000 on a car that has a current fair market value of $7,500.00, it may be possible to reduce the balance of your loan from $10,000 to $7,500. The remainig $2,500 is treated like an unsecured debt and paid only from whatever funds are left after your secured debt balances are paid in full. Any unpaid portion is discharged (eliminated) after you complete your chapter 13 plan.

To make paying for the car, or other property even easier, chapter 13 allows you to prioritize payments to secured creditors over payments to unsecured creditors. This means that the secured creditors which hold liens on your personal property such as your car get paid first. The unsecured creditors only get whatever funds remain in the chapter 13 pot after the secured balances have been paid in full. Any unpaid unsecured debt balances are discharged once you complete your chapter 13 reorganization.

Taken together, the chapter 13 provisions will greatly increase your chances of keeping the property your puchased, and even in making it completely yours.

I will evaluate your entire situation and advise you if chapter 13 is a viable option during the initial consultation before you even file.

repossession / BKguy nutshell:

  1. Automatic stay stops any repossession efforts and can force the lender to give car back after it has been repossessed.
  2. You pay-off the entire loan (including the arrearage) during the 3 to 5 year reorganization period by making your Chapter 13 plan payments monthly to the Chapter 13 trustee who distributes the funds to your lender.
  3. As long as all your payments are timely, the automatic stay remains in effect and the lender cannot repossess your property.
  4. You can force the lender to accept a low interest rate, stop penalty fees, and it may be possible to reduce the balance of the loan to market value of the collateral ("cramdown").
  5. You restructure all your other debts to increase chances of successfully completing your reorganization

Reduce Secured Loans to Market Value of Collateral (Cramdown)

"Cramdown" is a concept that allows you to reduce the balance of a secured loan to the fair market value of the personal property securing it (the collateral).

Because personal property loses value quickly after the purchase, a cramdown may significantly reduce the remaining balance of the loan. The money saved can be applied towards mortgage arrears or other secured or priority debts.

To cramdown the loan, the reduced balance must be repaid during the 3 to 5 year period of the chapter 13 plan.

Cramdown of a car loan:

Generally, cramdown of a car loan balance to the market value of the vehicle securing the loan is only allowed when the vehicle was purchased more than 910 days (2 1/2 years) before the chapter 13 bankruptcy case is filed.

However, this rule only applies if the vehicle was (1)purchased primarily for personal use, and (2) was purchased with a loan taken out specifically for the purchase of that vehicle, thus giving the lender a purchase money security interest.

Cramdown of loans other than a car loan:

Cramdown of loan balances secured by personal property other than a car (e.g. furniture, electronics, etc.), is only possible if the debt was incurred more than 1 year before the filing of the chapter 13 bankruptcy case.

car loan cramdown / BKguy nutshell:

  1. Car must have been purchased more than 910 days (2 1/2 years) before filing of case.
  2. If purchased within the 910-day period, cramdown allowed only if (1) car was not purchased for personal use or (2) car was not paid for with a funds borrowed for the specific purpose of buying the vehicle.

other cramdown / BKguy nutshell:

  1. Only possible if debt to purchase the property was incurred more than 1 year before filing.

Contact me directly with any questions or concerns by phone, text, or email.