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Can a NJ Chapter 13 bankruptcy help me lower my car payment?

Yes, sometimes it can!  One roadblock to paying your debts in a New Jersey chapter 13 bankruptcy plan is a high car payment. This can limit the amount of disposable income that you have available to pay to the trustee.

Many times people have a higher payment on their car because they traded in a car that had a loan balance that exceeded the vehicle's trade-in value. The difference then gets rolled into the loan on the new car purchase and make the monthly payment much higher. Bankruptcy can sometimes help lower this payment.

How Can Bankruptcy Help?

The bank on the car loan is considered a "secured creditor" because they have a lien on the vehicle. The bankruptcy courts, however, take a realistic view of this status when the value of the car is less than the balance due.

In other words, if the car is worth $1,000, and you owe $3,000, the bank is not secured as to the whole amount; they are limited to the $1,000.

Is There a Catch?

Therefore, under certain circumstances, the court can "cram down" the secured portion of the loan to the $1,000, and treat the other $2,000 as unsecured debt with your credit cards and medical bills. There are certain "catches" to that, however.

  • You must have had the loan for at least 910 days (2 1/2 years) before you filed the bankruptcy;
  • You must complete the plan, and not have it dismissed or converted to a chapter 7. This will screw up the cramdown and result in your coming out of the bankruptcy behind on your car payments.
  • You might end up paying for the car longer, as the balance of the loan term might be shorter than that of your plan.

How it works in the example above is the $1,000 balance would be re-amortized at the loan interest rate over the life of your bankruptcy repayment plan. You would then make that payment to the trustee, who would forward it on.

The rest of the $2,000 would be put into the pot of unsecured debt that includes credit cards and medical bills. Upon completion of your plan, the unsecured balance is discharged, and your loan is paid in full!

But Is This Right for Me?

A cramdown is not the right solution for everyone for various reasons, so you should talk with an experienced bankruptcy attorney about whether it is right for you.

If you live in southern New Jersey and are considering bankruptcy, please feel free to call my office at 856-432-4113 or contact me through this site to schedule a consultation in my Woodbury office to discuss your options.

If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.

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Steven J. Richardson
Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.