Dealing with Your Vehicle Loan During Bankruptcy in Ohio
How would filing for a Chapter 7 or Chapter 13 affect your car loan? A lot depends on if you are behind on the loan payments and the type of personal bankruptcy you seek. Here are some basics that will help you understand what to expect in terms of managing your vehicle loan during a bankruptcy action.
Your Auto Loan and Filing for a Chapter 7 Bankruptcy
A Chapter 7 bankruptcy typically requires up to six months to complete. As part of the proceedings, you agree to surrender to the trustee all assets that are considered non-exempt.
What this means is that any assets the current bankruptcy laws do not consider necessary for maintaining a reasonable standard of living will be surrendered and sold under the direction of the court. All funds collected from those sales are distributed to your creditors according to a plan approved by the court. The remainder of your debts are discharged.
The motor vehicle exemption in the State of Ohio is limited to $3,675. This means that a chapter 7 debtor can shield the equity they have in their vehicle up to $3,675.00.
If you are financing your vehicle, the lender will typically require that you sign a reaffirmation agreement. In other words, you are committing once again to the same terms and conditions that you agreed to when the vehicle was purchased. If you can afford the payments and the value of the vehicle is still more than what you owe, this may be a good idea. If it’s not worth at least what you owe, consider including the debt in your Chapter 7 filing.
The point to consider is what’s known as the deficiency balance. That’s the difference between what you owe and what the vehicle would bring at an auction if the creditor repossessed the car or truck. If the vehicle would not generate enough revenue to cover the balance of the loan plus any fees or charges related to the repossession, you would be liable for the balance.
How Would a Chapter 13 Affect the Loan?
With a Chapter 13, some portion of your debts will be repaid over the term of the plan. The Chapter 13 Trustee manages the disbursements to your creditors. Secured debts come first, then priority debts like taxes, then your unsecured debts. If during the three to five-year period you are able to settle all your priority debts but not all of your unsecured debt, the remaining balances are discharged.
Filing a Chapter 13 buys time to catch up on any missed auto loan payments or use a process known as a cramdown to restructure the auto loan. As part of the Chapter 13, the loan terms and conditions are re-written, so the remaining payments fit more easily into your budget. With a cramdown, you don’t have to worry about catching up on any payments that are in arrears. They are accounted for in the restructured terms and conditions.
Along with lower monthly car loan payments, you could end up saving quite a bit of interest. Your legal counsel can help you understand how this would work and what it would do in terms of helping you live within your means for the duration of the Chapter 13.
The goal of any bankruptcy action is to help you regain control of your finances. Talk with your attorney about the best way to deal with the auto loan based on your financial situation. It won’t take long to identify your best options, explore each one, and come up with the solution that’s right for you.