There is no question that reliable transportation is essential to functioning as part of the American economy. Whether it be the means for an employee to get back and forth to work, or for a retiree to travel for necessary medical care, we must have transportation. It is even more of a necessity to have a car in Augusta and the surrounding counties of Burke, Columbia and McDuffie, as public transportation is limited, if available at all. Because of unemployment, separation, or medical issues, a person may have fallen behind on their car payments. Preventing the loss of a vehicle is a frequent reason for the filing of the bankruptcy. But unfortunately the urgency in preventing the repossession of the vehicle may prevent the opportunity to evaluate the pros and cons of keeping the vehicle.
A Chapter 13 bankruptcy is a court-supervised repayment plan which will allow a debtor to adjust their debts over a period of between 3-5 years. In exchange for the bankruptcy court’s protection of the debtor’s assets – in this case the car – the debtor agrees to pay a portion of their earnings over the life of the plan. Other debts such as medical bills, credit cards and collection accounts would also be included in the repayment plan. A Chapter 13 bankruptcy can also allow the debtor to reduce the interest rate on a car loan, usually to around 5.5%, depending on how long the person has owned the car. This can be a considerable savings if the car was financed at a double-digit interest rate. The ability to reduce the interest rate on secured debts is one of the advantages of a Chapter 13 bankruptcy.
A Chapter 13 bankruptcy can also allow the debtor to pay for the car based on what it’s worth, and not what is owed on the loan, provided that the car was purchased more than 910 days (essentially 2 ½ years) before the Chapter 13 case was filed.[i] Once again, this can be a considerable savings if the debtor was upside-down on the car, either due to significant depreciation, damage, or an unfavorable trade-in. The value can be determined based upon several sources, including the NADA book, Kelley Blue Book or even an independent appraisal. However, if the vehicle has not been owned for 910 days, the debtor will have to pay the full balance on the loan through the Chapter 13 case, even though the car or truck may be worth significantly less.
The final method in which a Chapter 13 bankruptcy can make a car loan more affordable is that it can lengthen the remaining payments up to 5 years. So a person who has a burdensome monthly payment on a loan with 24 months remaining could propose a 60 month repayment plan which would reduce the monthly expenditure on the car loan. But if the remaining term of the loan is already close to 60 months, the debtor may not see any savings in the monthly payment.
So when does it make sense to keep the vehicle in a Chapter 13 plan? Obviously you want to keep it if you have built up equity in the vehicle, especially if you have had it for a long period of time. Even if you are upside-down on the vehicle, a Chapter 13 will allow you to reduce the balance to be paid back to the lender as long as you have had it for over 910 days. It also helps if the vehicle is still under warranty, or otherwise in good mechanical condition. Because of the limitations on incurring debt in a Chapter 13 case, money may not be available for repairs necessary to keep the vehicle operational. In a nutshell, a person who has a late-model vehicle, in good mechanical condition, and has less than 48 months remaining on their car loan will probably be best served by a Chapter 13 to prevent the repossession of the automobile.
Unfortunately, there are many circumstances where a Chapter 13 case may not make a vehicle more affordable, or could otherwise cause more long-term problems than it would solve. For instance, if the remaining loan term on the vehicle is more than 60 months, the amount paid per month on the vehicle in a Chapter 13 case may actually increase. For instance, a debtor who has made 6 payments on a 72 month loan will still have 66 payments left. Because a Chapter 13 plan cannot last more than 60 months, the car loan will be condensed into a shorter period of time. Even a reduction in the interest rate may not be enough to offset the reduction in payment time. Also, the maximum attorney’s fees that can presently be charged for a Chapter 13 in the Southern District of Georgia are $3000. Most, if not all, of these fees can be paid through the Chapter 13 plan as well. Essentially, this is adding another $3000 ($50/month) to the car loan.
The Chapter 13 Trustee also collects a fee equal to 10% of the amount distributed through the plan.[ii] So if a debtor reduces the interest rate on their car loan from 13% down to 5% in a Chapter 13 plan, they are not really saving anything since the Trustee commission combined with the reduced interest ate totals 15%. The net effect of the Trustee commission may actually be higher, as it will include distributions to all of the creditors, and not just the auto lender.
It also may not make sense to file a 5 year Chapter 13 plan to save a 10 year old car, especially if it was purchased within the 910 day “safe haven” period. Five years is a long-time, and many of those vehicles won’t make it to their 15th year. Even if they do, the cost of maintenance may not make it worthwhile. And as stated previously, the debtor will not have the opportunity for quick credit to keep it roadworthy. On the other hand, if the vehicle has been owned for more than 910 days, the Chapter 13 may create the ability to actually pay the vehicle off more quickly, since both the interest rate and balance can be reduced.
Most bankruptcy attorneys in the Augusta area offer a free consultation, and if you are facing the repossession of your vehicle, it certainly makes sense to meet with one and learn all of your options. But if the vehicle is your primary concern, be realistic when you meet with an attorney and consider all of the issues raised in this article. A follow-up article will be forthcoming to discuss your bankruptcy options if you decide to “dump” the car.
[i] There is another exception which allows for a vehicle to be paid based upon its value, and not the balance, if it was acquired for commercial purposes. But that is not relevant for the purposes of this article.
[ii] This amount is for the Chapter 13 Trustee in the Augusta Division of the Southern District of Georgia, and the rate is periodically evaluated and adjusted.