Keep a car and reduce payments in Chapter 7?

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Dear Bankruptcy Adviser,
For the last 3½ years, I have been under a Chapter 13. I want to know if I convert over to a Chapter 7, can I still keep my car, and can payments be reduced because my income has changed due to a knee operation?
— Mary

Dear Mary,
You will have to be very careful, Mary; you might not be able to keep the vehicle. You will need to know whether the lender considers your car loan in default before you convert to a Chapter 7.

As you know, a Chapter 13 is called reorganization bankruptcy. That means you are repaying some or all of your debt over the next three to five years. A trustee is assigned to your case to monitor and administer your payments to the creditors.

Depending on the district in which you live, you will pay off the balance of your car through the trustee of your bankruptcy. For example, in a bankruptcy filed in Los Angeles, you can make your car payment directly to the car lender. However, in Sacramento, Calif., you make the payment each month to the trustee, who then mails a payment to the car lender.

If you are paying off the car through the Chapter 13 plan, the remaining car balance is spread out over the three- to five-year repayment period. For example, if you have a $20,000 balance on the car at 5 percent interest, the payment throughout a five-year plan will be approximately $377 per month.

Here is the problem: Let’s say the car payment was $500 per month prior to filing the bankruptcy and you have been making a payment to the trustee for 12 months. The lender would have received at least $6,000 in payments had you not been inside bankruptcy. Inside the bankruptcy, the lender received only $4,524.

That means, in the eyes of the lender, you are at least $1,476 delinquent. This delinquency would not matter when you are still protected inside an active Chapter 13 bankruptcy. But converting to the Chapter 7 could mean that the lender will consider your loan in default. In most cases, when you are delinquent on car payments prior to filing a Chapter 7, the lender will not work with you and will proceed to receive court permission to repossess the car.

Some lenders, most notably credit unions, may allow you to cure delinquencies or rewrite the loan. Unfortunately, most big lenders are not going to work with you. You would be considered in default and you would lose the car.

Obviously, if you are making the payment directly to the lender and not through the Chapter 13 trustee, you are more likely to keep the car when you convert. I don’t know the specific facts of your case; therefore, I cannot say for sure whether you qualify to convert to the Chapter 7.

You ought to find out the lender’s position prior to converting, as well as determine whether you are current on the car payments. This is the only way to be certain that you can keep the car after converting to a Chapter 7.

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