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Chicago Bankruptcy Basics: Vehicles in Chapter 13

Some of the primary reasons that people file for Chapter 13 bankruptcy in the Chicago are involve their vehicles.  Whether it be to protect a financed vehicle from repossession, recovering a vehicle that has already been repossessed, reducing existing vehicle payments or protecting a paid in full vehicle that has more equity than what the Illinois exemptions can protect, vehicles drive a lot of Chapter 13 filings (I don't apologize for the pun).

When you file for Chapter 13 bankruptcy protection, you are required to disclose all vehicles in which you have a legal interest at their current fair market values.  If there is any debt attached to the vehicle, this too must be disclosed, notice must be given to the creditor(s) and the debt must be treated in your Chapter 13 plan of reorganization.  This does not mean that you will lose the vehicle(s), as the purpose of Chapter 13 is to protect those assets that are reasonable and necessary for your reorganization.  Upon filing for Chapter 13, the bankruptcy court issues the automatic stay of bankruptcy, which is basically an injunction against your creditors prohibiting any further collection action.  This is what protects a vehicle from repossession and what requires the lender, in most circumstances, to return a vehicle that has already been repossessed.

If the vehicle(s) in question are paid in full, it is a very simple analysis.  You schedule the value of the vehicle and exempt as much as of the equity as legally possible.  In Illinois, you are entitled to one $2,400 motor vehicle exemption and one $4,000 personal property exemption per filer.  If there is value above the amount of the exemptions, then you are required to pay at least that amount to your unsecured creditors through your Chapter 13 plan of reorganization.  Failure to do so will mean that the proposed plan is unconfirmable on its face.

If the vehicle(s) is financed, things get a little more tricky in Chapter 13.  You always have the right to surrender the vehicle back to the lender.  They will take the vehicle, sell it and apply the sale proceeds to the loan balance.  Any remaining debt will be treated as an unsecured debt within your plan.  If you want to keep the vehicle and are the only one on the loan, then the treatment will depend on how long ago you financed the vehicle.  If you financed the vehicle less than 910 days prior to the Chapter 13 filing, then the full balance on the loan must be paid within the Chapter 13 plan.  If you financed the vehicle more than 910 days prior to the Chapter 13 filing, then you can "cram down" the vehicle.  This basically means that instead of paying the full balance of the loan, you only pay the value of the vehicle.  The difference is again treated as an unsecured debt in your plan.  In either case, the effective interest rate on the loan can usually be significantly reduced, as can the payment.

If you have a cosigner on the loan, then in order to protect the cosigner and eventually get title to the vehicle, you will be required to pay not only the full balance on the loan, but also the full contract rate of interest within the Chapter 13 plan.  If a cosigner is making the direct payments on the vehicle, then it can simply be left outside of the Chapter 13 plan, but this must be disclosed and addressed in the plan.

You do have the right to maintain direct payments on the vehicle outside of the Chapter 13 plan.  You must realize, however, that if you elect to do so and the payments end during the life of the Chapter 13 plan, the trustee will see the amount of the car payment as additional disposable income and expect your plan payment to increase once the vehicle payment ends.

Now, just to make it a bit more complicated, any financed vehicle that you are proposing to keep while under the protection of the Chapter 13 bankruptcy must be deemed by the court to be "reasonable and necessary for your effective reorganization".  If it is not, then the court will not confirm (approve) your Chapter 13 plan of reorganization unless it calls for the full repayment of all of your debts.  This is a common issue when someone attempts to keep a luxury car, multiple financed vehicles, a financed boat or their financed Harley Davidson and proposes to pay their unsecured creditors only pennies on the dollar.  The court will not consider this as acting in good faith and will not confirm a plan with these provisions. 

If you are considering filing for Chapter 13 bankruptcy protection in the Chicago area, odds are that you have at least one vehicle.  To ensure that your vehicle(s) is properly protected and treated within your Chapter 13 plan, you need the representation of an experienced Chicago bankruptcy attorney.  The bankruptcy lawyers at Ledford & Wu all have years of experience representing those in Chapter 13 bankruptcy and are happy to offer a free consultation to review your options.

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