For New York bankruptcy debtors, owning a car magnifies the importance of the decision to file in chapter 7 versus chapter 13. In chapter 7, debtors must choose if they will surrender or redeem their vehicles, or if they will reaffirm or simply keep paying their auto loans. Chapter 13 debtors can expect their auto loans to play a clear role in their repayment plans throughout their duration, even if they cram them down to their market values. Are there advantages to surrendering one’s vehicle in chapter 13? What are they?
To begin with, chapter 7 offers clear advantages to surrendering a vehicle. One, chapter 7 will quickly discharge the deficiency from the remaining debt after the lender resells the vehicle. In some cases, the lender might even cancel the deficiency. So why bother considering chapter 13 at all?
The answer is that chapter 13 provides debtors with the opportunity to decide when to sell their vehicles if they choose to. Some might need their cars for the next several months and don’t have a ready replacement. Others may have compelling reasons to file chapter 13 irrespective of their cars. Debtors might be able to use their cars now, surrender them later, and then convert their cases to chapter 7. Finally, debtors choosing to promise to surrender their vehicles in their repayment plans might see a substantial reduction in their monthly plan payments.
Lurking behind these questions is what happens to auto debt in chapter 13 when the debtor surrenders the vehicle securing it back to the lender. Once the debt is no longer secured, it becomes an unsecured debt that gets discharged like credit-card debt. Now, bankruptcy debtors might think that the deficiency needs to be repaid in full, but it does not. Just like any other unsecured debt, some of it will need to be repaid in New York bankruptcy. On net, the amount debtors will pay decreases.
Here’s an example. A debtor owes $10,000 on an auto loan and another $10,000 in credit-card debt. Normally, the debtor would repay $10,000 on the auto loan and some percent—we’ll say 10—of the credit card debt, or $1,000. If the debtor surrenders the vehicle for a $2,000 deficiency, then that’s added to the total credit-card debt, now $12,000 in unsecured debt, and the amount repaid will be $1,200. That’s significant savings.
Many chapter 13 debtors have cars that are too new to either exempt in chapter 7 or cram-down in chapter 13, yet they’re still unaffordable. If you are struggling financially, then talking to an experienced New York bankruptcy lawyer can help you strategize your options for keeping—or not—your car through bankruptcy.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 Bankruptcy Attorney Brooklyn NY Bruce Weiner for a free initial consultation.
