May 6th, 2010 by Reed Allmand 
If you’re filing for bankruptcy, it’s important to understand that car loans are treated differently in Chapter 11 bankruptcy than they are in Chapter 13 bankruptcy. If you’re a high income debtor you may need to file Chapter 11 bankruptcy; but one of the benefits of Chapter 11 bankruptcy is how care loans are treated in that type of bankruptcy. Let’s take a look to see how a Chapter 13 debtor’s car loan would be treated during bankruptcy.
A debtor in Chapter 13 bankruptcy cannot modify the principal on a car loan if the car was purchased within 910 days of filing bankruptcy. But a Chapter 11 bankruptcy debtor is not bound by those time limits and may be able to modify the car loan’s principal and interest regardless of when the vehicle was purchased.
For example, let’s imagine that a debtor rolled $10,000 of negative equity into a 2010 model car, paying a total of $47,600. Let’s also imagine that the debtor has bad credit is paying 20 percent interest on the vehicle. The debtor is swimming in so much debt that he files bankruptcy 400 days after purchasing the car. At the time of filing for bankruptcy he has missed many months of payments and now owes $50,000 plus interest, late fees and penalties. At the time of the bankruptcy filing the car’ Kelly Blue Book value is only $30,000.
If the debtor files Chapter 13 bankruptcy, because the vehicle was purchased within 910 days of filing bankruptcy, he will not be able to modify the principal on the car loan and could end up paying much more than the car is worth. On the other hand if the debtor files Chapter 11 bankruptcy, he may be able to reduce both the principal and interest to bring the car loan in line with the true value of the car. In the end, a debtor in this situation would hypothetically pay significantly more per month for their car loan in Chapter 13 bankruptcy compared to a Chapter 11 bankruptcy. However, it is important to remember, that is it the time factor that makes the difference. If you have a car loan that was recently acquired and you want to file bankruptcy please discuss with your bankruptcy attorney.
About Reed Allmand
Allmand's vision is rooted in his own financially precarious childhood in Abilene "My father always had difficulty holding a job and supporting our family, so after my parents divorced when I was 12, my sister and I got jobs to help make ends meet," he recalls. "I remember what it felt like as a child to worry that our car would be repossessed or home foreclosed on."
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