Can I Put My Car Loan in a Chapter 13?

Chapter 13 bankruptcy offers individuals with consistent income a structured pathway to repay debts over a period, typically three to five years. This process allows debtors to reorganize their finances under court supervision, often providing relief from overwhelming obligations. A common concern for many contemplating this financial restructuring involves their vehicle loans, which represent a significant secured debt for many households. Fortunately, Chapter 13 includes specific provisions designed to manage secured debts like car loans, offering various mechanisms to address these obligations within a personalized repayment plan. These mechanisms aim to provide flexibility, enabling debtors to retain their vehicles while working towards financial stability.

Car Loan Options in Chapter 13

The “cramdown” can significantly reduce the principal balance owed on a vehicle. This option is generally available if the vehicle was purchased at least 910 days, or approximately 2.5 years, before the bankruptcy filing. A cramdown allows the debtor to reduce the secured portion of the loan to the current fair market value of the vehicle, rather than the outstanding loan balance. The remaining balance then becomes an unsecured debt, treated similarly to credit card balances or medical bills, which may be paid at a reduced rate or not at all through the Chapter 13 plan. The interest rate on the crammed-down portion of the loan can often be lowered to a court-determined rate, often set as the prime rate plus one to three percentage points, resulting in substantial savings.

Maintaining regular payments on the car loan is another method. If the debtor is current on payments and the original loan terms are favorable, or if a cramdown is not applicable due to the 910-day rule, the debtor can continue making payments directly to the lender, known as paying “outside the plan.” This approach keeps the original interest rate and payment schedule intact. Alternatively, payments can be made through the Chapter 13 trustee as part of the overall repayment plan. While this may incur a trustee fee, typically up to 10% of the payment, it ensures consistent disbursement to the lender and can sometimes facilitate an adjustment of the interest rate to a lower, court-approved rate.

Surrendering the car to the lender is an option within Chapter 13 for those who no longer wish to keep their vehicle or find the financial burden too great. This choice eliminates the obligation for future payments on the vehicle. Once the vehicle is surrendered, the lender sells it, and any remaining balance after the sale, known as a deficiency, is reclassified as an unsecured debt. This deficiency is then included in the Chapter 13 plan alongside other unsecured debts, meaning the debtor may only pay a fraction, or none, of this remaining balance, with the rest potentially being discharged upon successful completion of the plan.

Chapter 13 also provides a mechanism to address missed car payments, or arrearages. These can be included and repaid over the life of the plan, helping debtors catch up and avoid repossession.

Factors Affecting Your Car Loan in Chapter 13

Several important factors require careful assessment before deciding on the best course of action for a car loan within a Chapter 13 plan. Accurate vehicle valuation is important, particularly for a cramdown. Fair market value, what a willing buyer and seller would agree upon, is the standard used in bankruptcy. Debtors can determine this value using reputable sources such as Kelley Blue Book or the NADA Valuation Guide, taking into account the vehicle’s make, model, year, mileage, and overall condition. An independent appraisal may also be necessary if the vehicle’s condition is unique or if there is a dispute over its value.

Existing loan details, including outstanding balance, terms, and interest rate, heavily influence the feasibility of different options. A loan with a high interest rate, for instance, might make a cramdown more financially advantageous, even if the equity position is not significantly negative. Conversely, a low-interest loan on a newer vehicle might favor continuing payments under the original terms. Understanding whether the vehicle is “upside down,” meaning the loan balance exceeds its fair market value, is particularly relevant for the cramdown option. If the car has positive equity, a cramdown is not applicable, as the loan balance is less than or equal to the vehicle’s value.

Chapter 13 eligibility also plays a significant role, as statutory debt limits apply. As of April 1, 2025, an individual’s unsecured debts must be less than $526,700, and secured debts must be less than $1,580,125 to qualify for Chapter 13 relief. These limits are subject to adjustment every three years. The total amount of secured debt, which includes the car loan, must fall within this threshold for the debtor to be eligible to file under Chapter 13.

The debtor’s income and ability to fund the repayment plan are important considerations. Courts apply a “disposable income test” to ensure that the proposed plan reflects the debtor’s “best effort” to repay creditors. This involves calculating the income remaining after deducting reasonable and necessary living expenses, as well as payments for secured and priority debts. Sufficient disposable income is required to cover the proposed car loan payments, whether full or crammed down, and other obligations within the Chapter 13 plan.

Integrating Your Car Loan into the Chapter 13 Plan

Once the most suitable car loan approach is determined, it must be formally integrated into the Chapter 13 bankruptcy process. The chosen treatment, whether it is a cramdown, surrender, or continued full payment, must be clearly outlined in the Chapter 13 plan document. This detailed plan serves as the debtor’s proposal to the court and creditors for how all debts will be addressed over the plan’s duration, typically three to five years.

The Chapter 13 plan is filed with the bankruptcy court. The car loan lender, as a creditor, reviews the proposed plan. Lenders may object to certain aspects of the plan, particularly if they disagree with the proposed valuation of the vehicle for a cramdown or other terms that might affect their claim. Such objections are typically addressed through negotiation or, if necessary, a court hearing where the judge will resolve the dispute based on presented evidence.

The court holds a confirmation hearing, reviewing the Chapter 13 plan for legal compliance and feasibility. If approved, the plan is “confirmed” and becomes a legally binding agreement. At this point, the terms for the car loan, as specified in the confirmed plan, are set.

For many car loan treatments, payments are no longer made directly to the lender. Instead, they are channeled through the Chapter 13 trustee, who collects the monthly plan payment from the debtor and disburses amounts to creditors according to the confirmed plan. This centralized payment system helps ensure compliance and proper distribution of funds. Upon successful completion of payments and other requirements, the debtor receives a discharge of remaining eligible debts. If the car loan was paid off through the plan, the lien on the vehicle is released, and the debtor owns the car free and clear.