So you've gotten your Chapter 13 bankruptcy confirmed by the court. If you have a car and a car loan, and you're like most Chapter 13s, then your car loan has probably been included in the Chapter 13 plan. You've been making your required monthly plan payments, and all is going well.

Then, one day, you're involved in a car accident, and your car is totaled; a complete loss for which the insurance company (yours or the other driver's) will be making a "payout." You want the money to go buy a replacement car, but the insurance company will only pay out the money after getting title to the old (wrecked) car so that they can take it to the junk yard where they will get some small amount of money for it. Who is holding title to your old car? Your car lender; and they won't release the title until they get paid the balance of the loan that you still owe. Basically, your lender wants the money from the insurance payout. So, you need the title to get the money, but you need the money to get the title. So what do you do?

Well, for purposes of this discussion, we'll ignore the possibility that your car lender's refusal to release the car title without payment is actually a collection activity in violation of the Automatic Stay that has been in place since your bankruptcy was filed (which it may be).

For now, we'll look at a likely more mutually agreeable course of action that will certainly involve much less arguing, threatening, and court time, and will still result in your being able to purchase a replacement car.

Consider a "Substitution of Collateral." Essentially, a Substitution of Collateral is where your car lender will agree to move the lien that they have on the old (wrecked) car to a new (substitute) car. Basically, the new car becomes the security for the old loan.

Because this type of action in the middle of the a Chapter 13 requires court approval, a Substitution of Collateral starts with the filing of a Motion To Substitute Collateral (by the Debtor's attorney) with the Bankruptcy Court (it is, however, recommended that you discuss this idea with your car lender before filing the Motion to get a feel for whether they are going to be agreeable or whether this type of Motion is going to be met with resistance).

In the Motion you layout the steps that will be undertaken by the Debtor to identify a proposed new car, and the timeframe by which the lender can review the car proposed by the Debtor to be the substitute collateral (basically, the car will have to be worth at least as much as the amount of the outstanding loan; anything less and the lender's interest will not be fully secured by the proposed substitute vehicle, and you can expect an objection). You will also want to provide for who will receive and hold the insurance payout proceeds and the title to the old (wrecked) car, until such time as the purchase of the substitute car can be completed.

Once the Debtor has identified a proposed substitute car, and the lender has had the opportunity to make sure the car is worth the value of the outstanding loan, then it is time to complete the purchase of the substitute vehicle. The person holding the title to the old car will send the title to the insurance company that paid out the money, and will also release the money from the insurance payout to the dealer selling the substitute vehicle (keep in mind that the lender will also want to see other necessary documentation from the dealer before the transaction is completed, such as a signed Buyer Order Form, a signed Odometer Disclosure, and a Validated Title Application to make sure that their lien is going to be perfected).

Once this is done, the transaction/Substitution is complete, and will likely have been accomplished with much less hassle than going virtually any other route in trying to get the insurance proceeds so that you can replace your old car.