How is a car loan handled in chapter 13 bankruptcy?

In a Chapter 13 bankruptcy, a car may be surrendered, kept and paid directly, or kept and paid in the plan.  How the car is treated depends on the debtor’s wishes, the value of the vehicle, and whether the debtor has adequate income to keep the vehicle.

Surrender

In bankruptcy, the debtor typically has the option to surrender secured property.  This is the case with a car.  The debtor may simply give the vehicle back and anything owed is then considered unsecured.  The unsecured debt, such as credit cards and medical bills, receive a pro rata distribution from the bankruptcy estate depending on how much is left over after secured and priority debts are paid.

Paid Directly

If the debtor decides to keep the vehicle and is not behind in payments, they may determine it is beneficial to pay the loan directly.  This means the debt is not included and paid through the court in the Chapter 13 plan but is instead paid in regular payments to the creditor.

Paid in Plan

There are certain advantages to paying for a car in a Chapter 13 plan.  In some cases, the debtor may be able to pay back the value of the car instead of the loan amount, which is very beneficial if the debtor is upside down in a car note.  The term of the loan may also be modified.  For example, if a loan originally had two years remaining, it may be added in the bankruptcy and extended through the length of the plan, which is three to five years.