If your car was recently repossessed by the finance company, you have the ability under Chapter 13 bankruptcy law to recover that vehicle. You do so by filing a Chapter 13 bankruptcy case and proposing a plan to reorganize or repay that auto debt over time. You can reduce the interest rate owed to the finance company no matter when you file the chapter 13. For example, if the vehicle was purchased more than 2 1/2 years prior to filing, then the vehicle can be crammed down to the actual market value. The remainder can be paid as an unsecured debt of less than 100%. If the vehicle was purchased within the past two and half years, then the contract rate must be maintained. However, the interest rate can be reduced to approximately 6%.
Recent Example
In a recent case, a client came to see me with regard to recovering a recently repossessed vehicle. The vehicle was contracted at approximately $12,000 and the interest rate was 23%. The debtor would eventually pay back approximately $31,000 over the life of the loan if the debtor did not file for Chapter 13 bankruptcy. By filing chapter 13 bankruptcy, the debtor was able to recover the vehicle, pay back the contract rate of $12,000 and reduce the interest rate over the 60 months of the case to 6%. The debtor was able to recover the vehicle despite the fact that it had been repossessed within two weeks of her filing her case. She had no other significant debt other than her vehicle. I gave her the option of either filing a Chapter 13 to recover her vehicle or to file a Chapter 7 bankruptcy case and surrender her vehicle with the knowledge that she would be able to get another vehicle post-filing.
Chapter 7 Option
Chapter 7 would allow the debtor to get out of the prior financing deal in its entirety. The debtor would then be able to visit a bankruptcy friendly auto dealership subsequent to her chapter 7 filing and enter into an agreement for a used vehicle. This would allow the debtor to stand in a greater equity position with a new vehicle as opposed to trailing behind in equity with the recovered vehicle under Chapter 13. After much consideration and analysis, the debtor opted for keeping her existing vehicle and filing a reorganization case. She had the ability, according to her budget, to
make an approximate monthly payment to the trustee of $425 per month. Since she was paid weekly, she was going to have less than or approximately $100 per week deducted out of her pay to be applied towards a reorganization. This was the plan that the debtor agreed to in order to recover her vehicle.
Conversion Possibility
The debtor was also given the advice that should the chapter 13 not prove successful, then she had the ability at a later time to convert the case to chapter 7. The debtor was basically given the opportunity to see whether or not she could realistically handle the financial package of paying the trustee $425 per month and maintaining her other monthly living expenses. The debtor agreed to chapter 13 knowing that if it became too difficult or too burdensome financially, then she had the ability to convert to chapter 7 bankruptcy and get a used car subsequent to the conversion. The debtor is basically giving it the old college try in an effort to maintain the vehicle that was recently recovered.
Final Thoughts
In conclusion, filing bankruptcy comes down to decision-making on the part of the debtor and expertise on the part of the attorney. Most attorneys would not give the debtor the option or the knowledge to consider a conversion if things went astray. Most attorneys would be locked into one chapter or the other and would make a recommendation thereof. In this particular situation, the debtor was given both scenarios in addition to the rationale and thinking behind what each chapter would mean to the debtor. As of today, the debtor is proceeding with the reorganization plan. However, in the debtor’s back pocket is the ability at some time in the future, to convert the case to chapter 7 and obtain a start fresh.
