LIEN STRIPPING AN AUTO LOAN IN CHAPTER 13

Chapter 13 of the Bankruptcy Code contains many useful provisions that are not available to Chapter 7 debtors.  One of the most useful is the ability to "cram-down" an over-secured auto loan to the actual market value of the vehicle at the time of the filing of a Chapter 13 bankruptcy, and paying the auto loan over the duration of the Chapter 13 bankruptcy plan.

The Bankruptcy Code recognizes that a lien (like the lien a car lender has on the vehicle) is only secured to the extent of the current market value of the property.  If the amount of the lien is more than the value of the property, the debt is actually separated into two parts: secured and unsecured.  During a Chapter 13, the amount of the loan that exceeds the value of the vehicle can be stripped away.

For instance, if your vehicle is worth $10,000, but your auto loan balance is $13,000, the bankruptcy can separate the auto loan into a secured debt of $10,000 and an unsecured debt of $3,000.  The secured portion must be paid in full during the Chapter 13 case (such is the right of secured creditors in a Chapter 13), and the unsecured $3,000 amount will be paid along with other unsecured creditors (often at pennies on the dollar, if anything).

Another potential benefit to the Chapter 13 debtor is that the auto loan contract terms can actually be modified during the Chapter 13 repayment period.  In some cases the repayment period can be lengthened and/or the contract interest rate can be lowered by the bankruptcy court.  Changing the contractual terms can make a significant difference in the ability of the debtor to repay the debt, especially if your interest rate is very high. Again, these forced contract modifications can only occur in a Chapter 13 bankruptcy; it is not available in a Chapter 7 bankruptcy.

If you are struggling with debts you cannot pay and own a vehicle that is worth less than you owe, you may be eligible to reduce your principle and your monthly payment on your vehicle loan.  Speak with an experienced bankruptcy attorney and discuss how a Chapter 13 bankruptcy can help you reduce your debt and make your finances work for you and your family.