Lowering Your Car Payments in Bankruptcy

Is there any way to lower your car payments in bankruptcy? The answer, which may surprise you, is maybe. While Congress recently rejected attempts to pass a law that would allow bankruptcy judges to 'cramdown' mortgages, there do exist some limited possibilities for revising auto loans.

Basically, debtors who owe more than their car is worth – and who doesn't, especially if you bought it new? – may be eligible to eliminate the portion of the debt that exceeds the value. In a Chapter 13 bankruptcy, the debt would be divided into 'secured' debt (the value of the car) and 'unsecured' debt (the excess money on the loan), and the car loan would be revised to repay only the secured portion.

However, this option is generally only available for people whose car loans originated more than 910 days before they declared bankruptcy. Some courts have allowed, in limited form, for the portion of a car loan that was 'rolled over' from a previous car loan, to be treated as unsecured debt even in a more recently originated loan. However, note that a recent decision by the US Court of Appeals for the Fourth Circuit – whose jurisdiction includes North Carolina – has determined that this portion of a car loan is included as secured.

On the other hand, some attorneys report that some lenders are willing to renegotiate the loan, even if it originated in the last 910 days. While the law doesn't require them to renegotiate, it doesn't prevent them from doing so either. It's at least worth asking, before you take up your other options.

If your loan originated less than 910 days ago, and your lender refuses to renegotiate, what are your other options as you go through bankruptcy? You can simply surrender the car. Lenders don't like this option, but if you're filing bankruptcy, they have no choice. They will take back the car and then sell it at auction. The difference between what you owe and what they sell it for will be entered against you as a deficiency balance. However, even in a Chapter 13, there is little chance the creditor will receive any return on its deficiency balance.

You can also reaffirm the loan. In this case, you agree to continue making the payments on the car even after you file for bankruptcy. Note carefully, though, if you choose this option and then default on the loan, you will be responsible for the deficiency balance, and the lender can sue you for it. Reaffirming your car loan has some advantages though: you get to keep your car, which means you don't have to look for a new car loan with a recent bankruptcy on your record. Making these payments on time is also a good way to rebuild your credit – just make sure the lender is reporting them to the credit agencies.

As always, remember that the best way to negotiate this maze is with the help of a good bankruptcy attorney.