Stuck in a High Interest Car Loan? Chapter 13 Can Lower Rates

Here in North Carolina, a car is typically essential transportation. Owning a car can be vital to continued employment. Lenders and car lots know this, and are very willing to loan money to buy a car. The catch, however, is a high, sometimes very high, interest rate. A high interest rate strains a household budget, and can prolong the debt burden beyond the serviceable life of the car. Bankruptcy offers tools for consumers to get out from the burden of crushing auto loan interest.

Chapter 13 and Recent Car Loans

A chapter 13 plan can be proposed to pay off a balance of a car loan over time, typically over 3 to 5 years. However, the claim of the car lender is not paid under the contract terms. Instead, the balance owed is paid over time at the trustee’s interest rate (currently 5.25% in Raleigh NC). This can potentially work a great savings for the borrower and facilitate a financial turnaround.

As an example, let’s suppose a $15,000 car purchase is financed at 18% over a 6 year period. A year into the loan, the balance will be $13,332 with 60 more $342 payments. In chapter 13, this $13,332 is paid by the standing trustee at a 5.25% rate, or equal monthly payments of about $253. The chapter 13 plan payment would be higher to contend with trustee costs and attorney fees, but even including that might still be $334 a month, if no other claims require payment under the chapter 13 plan.

Chapter 13 does other things as well

It would be relatively unusual to file chapter 13 with the only debt being a high interest car loan. Usually, other debts are present when individuals have high interest car loans. Old credit cards, medical bills, and collections from prior car loans are all unsecured debts and are also subject to a chapter 13 bankruptcy. Unless there is disposable income or valuable assets, chapter 13 will ultimately discharge these sorts of debts without further payment.

For Older Car Loans, Chapter 13 adds “Cram Down”

If a car loan is older than 910 days (about 2.5 years) or is a refinance loan, a chapter 13 plan can propose to payoff the loan at the value of vehicle, instead of the balance of the loan. So, if a $9,500 is owed on a car worth only $6,000, the chapter 13 will pay the creditor $6,000 at 5.25%. The balance will be treated the same as other unsecured debts in the chapter 13 case.

What if I am just fed up with my car?

Sometimes, a car financed at a high interest rate proves to be a car not worth keeping. Bankruptcy doesn’t require retaining and paying for such a vehicle. In either chapter 13 bankruptcy or in chapter 7 bankruptcy, a car can be surrendered to the lender, with the balance treated as an unsecured claim, discharged at the conclusion of the bankruptcy.

Other Options

This article offers a brief overview of how bankruptcy can address the problem of a high interest car loan. These aren’t the only ways to handle car loans in bankruptcy. Sometimes, a borrower will leave the terms of a car loan completely intact through the bankruptcy. Rarely, a chapter 7 debtor might buy off the lien (redeem it) by paying the value of car in a lump sum. An individualized assessment of one’s options is recommended before concluding how bankruptcy might be used to restructure a car loan.

Photo of Erich M. Fabricius

Raleigh Bankruptcy Attorney Erich Fabricius is available to assist consumers throughout the greater Raleigh area who are filing chapter 13 bankruptcy. Based out of the Knightdale law office of Fabricius & Fabricius PLLC, Erich offers free consultations to consumers who may file bankruptcy.

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This blog post is made available for educational and informational purposes only and to promote a general understanding of the law, and not to provide specific legal advice. Use of this blog does not create an attorney-client relationship. Reading this post is not a substitute for obtaining legal advice based on the unique facts of your situation from an attorney licensed to practice law in your state. No representation is made regarding the currentness of the information contained in this post. Examples that may be provided in this post are merely for illustrative purposes; the results in your case may be different and no results are guaranteed.