When consumer bankruptcy laws let you lower your car payments — and when they don’t

Is it really possible that filing a bankruptcy case could reduce your car or truck loan, in addition to any other benefits?

The short answer is “yes, but.” Yes, but there are many restrictions that stand in the way of a debtor that wants to try this.

First off, filing a Chapter 7 case won’t do it. In Chapter 7, your only options are to keep making your payments on time (and keep driving the vehicle), or to turn in the vehicle and get rid of the payments.

It is Chapter 13 of the bankruptcy code that offers consumers the best chance to adjust their car payments downwards. In general, Chapter includes provisions that allow debtors to alter or “modify” secured loans.

But a major wrench was thrown to the works when bankruptcy code section 1325 was overhauled in 2005. The new law prohibits any modification for most car loans if the vehicle was acquired within 910 days before the bankruptcy case was filed (that’s two and one-half years).

But wait! A close reading of the section reveals some loopholes:

Most important, the 910-day rule does NOT apply if the vehicle is used primarily for business purposes.

Second, the rule also does not apply to loans that are not “purchase money” loans. In other words if you got a title loan on the vehicle, that CAN be modified, even if the money was lent within two and a half years before filing the case.

Finally, since the law speaks of a vehicle acquired “for the personal use of the debtor,” cars that are not so intended may be ripe for a modification. Depending on the facts of the case, you may be able to argue that a car used by someone else — your employee or family member, for example — should be subject to modification.

And what happens when an auto loan is “modified?” Typically, the balance of the loan will be reduced to the value of the vehicle on the date you filed the case, and the interest rate will be lowered to the vicinity of 5%.

Some debtors may be able to stretch out their payments as well. Then again, given the perishable nature of cars and trucks, many may elect not to.

These are good benefits indeed, for those who are willing to take a closer look at the consumer bankruptcy laws!

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