If you fall behind on car payments, Chapter 13 bankruptcy lets you keep your vehicle by restructuring your debt. This process reorganizes your financial obligations, including your car loan, into a manageable plan approved by the court. Instead of facing repossession, you gain time to repay what you owe more sustainably.
How car loans are treated
Chapter 13 includes your car loan in your repayment plan. You send payments directly to a bankruptcy trustee, who forwards the funds to your creditors. This repayment schedule spans three to five years and gives you time to cover past-due payments. If your car loan exceeds 910 days, you can repay only the vehicle’s current market value instead of the full remaining balance.
Lowering what you owe
A “cramdown” provision lets you reduce the loan principal to match the car’s current value if the loan originated over 2.5 years ago. For example, if you owe $12,000 but the car is now worth $8,000, your plan only requires payment on the $8,000 plus interest. The remaining balance becomes unsecured debt, and the court may discharge it at the end of your plan.
What if the lender repossessed your car?
If the lender recently repossessed your car, Chapter 13 allows you to reclaim it under certain conditions. You must act quickly, file the bankruptcy case, and include the loan in your plan. With court approval, the lender must return the vehicle. After the plan begins, the lender cannot take further action without court permission.
Staying on track
You must follow your Chapter 13 plan closely to keep your car. Make all payments to the trustee on time, and stay current on car insurance and taxes. Skipping payments puts your vehicle at risk. By following your plan, you resolve your debt while maintaining reliable transportation.
