Secured Claims in Chapter 13 Bankruptcy: Can I Catch Up on My House or Car Payment?

Updated by Cara O'Neill, Attorney
If you're behind on your mortgage or car loan, Chapter 13 bankruptcy allows you to pay your arrears over three to five years and keep your property.

If your lender is threatening to take back your property because you’ve fallen behind on the payment, Chapter 13 bankruptcy can help. Filing for Chapter 13 bankruptcy will stop the collection action in its tracks. You can then propose to catch up on payments over a three- to five-year repayment plan.

Why Some Debts Are Secured With Property

Simply put, when you take out a large loan, the money lender will want to get paid. The lender protects itself by requiring you to put up the purchased property as collateral, such as a house, car, or business equipment.

How does this benefit a creditor?

If you fail to make your payment on time (default), the lender can take back the property through foreclosure or by repossession, sell it at auction, and apply the proceeds to your balance. And, in many instances, continue to pursue you for any remaining balance.

In bankruptcy, this type of debt is known as a secured claim. Claims without collateral backing, such as credit card balances and medical bills, are unsecured claims.

How Chapter 13 Can Help You Keep Secured Property

Although it’s possible to stop such proceedings by bringing your account current, most people don’t have the money to do so. Fortunately, there’s another option. Not only will Chapter 13 bankruptcy stop a collection action in its tracks, but you’ll get the time you need to catch up on your overdue payments. The best part? As long as you fulfill all requirements, there’s nothing that the lender can do to stop it.

You can learn about the actual experiences of other bankruptcy filers in Can I Keep My House and Car in Bankruptcy? What Readers Had To Say.

The Chapter 13 Process

As soon as you file your bankruptcy case, the court stops most creditors’ attempts to collect against you—including foreclosure and repossession proceedings—by issuing an order called an “automatic stay.” The stay gives you time to prepare and submit a three- to five-year debt repayment plan to the bankruptcy judge for approval.

You’ll start making your proposed payments one month after you file. If the court approves your plan, you’ll continue to your court-ordered plan payment and keep your property. Otherwise, the bankruptcy trustee appointed to handle your case will return any payments to you.

Here are your secured claim options.

Let Go of Your Secured Property

Sometimes you don’t want to keep the property—especially if you can’t afford it or you owe more than it’s worth. (Although it might be worth your time to read How to Strip a Lien off Your Mortgage in Chapter 13 Bankruptcy. You’ll find a similar procedure for car loans explained below.)

If it makes sense, you can surrender the property to the lender. You’ll pay off the portion of the debt that you can afford (according to the bankruptcy rules) in your repayment plan. Once you complete your plan, you’ll be free of any remaining balance. The obligation will be discharged (wiped out).

Bring Your Mortgage Current

Sometimes you fall behind on a payment but want to keep the property. In that case, you can propose a payment plan that will pay the past due amount while you continue to make the regular monthly payment. For example, if your monthly payment is $2,000 and you have $10,000 in arrearages, you’ll pay $2,166 per month over the course of a five-year repayment plan (plus administrative fees).

In some jurisdictions, the bankruptcy court will require a “conduit” plan, which means that you’ll include the house payment in your monthly plan payment to the court. In other jurisdictions, you’ll make your house payment directly to your mortgage lender and pay only the past due amount through your payment plan. Once you’ve made all the payments in your three- to five-year plan, you’ll be caught up on your mortgage.

Pay Off Your Car Loan

Catching up on late car loans works the same way as your home mortgage with one exception: Depending on the age of the loan, you might have more options.

Here are your choices.

  • Make your regular car payments. If your vehicle loan is up-to-date when you file your Chapter 13 case, you can continue making your payments according to the terms of your car loan.
  • Pay the past-due amount through the payment plan. If your vehicle loan is behind when you file your bankruptcy, you might choose to start making your regular car payment directly to the lender but include the past due amount in your plan payment. However, some courts require you to pay the monthly payment and past-due amount through the plan if you’re behind when you file.
  • Stretch out the car payments through the payment plan. Even if you aren’t behind on your payment, you can choose to pay off your car loan balance in your plan—in fact, your court might require you to do so. This strategy can be helpful if your car payment is high and you have less than three years left to pay your loan. Stretching your balance over your repayment period should lower your monthly payment. For instance, if your payment is $400 per month and you have 24 payments left when you file your Chapter 13 case, it might be possible to stretch those payments out so that you pay just $160 (depending on your interest rate) each month as part of a 60-month payment plan.
  • The 910 “cram-down” rule. You have even more options if your car loan is at least 910 days old when you file your Chapter 13 case. You might be able to lower your interest rate and reduce the principal balance owed. For example, if you owe $15,000 at 18% interest, but the car is only worth $10,000, you might be able to reduce your interest rate to 6 or 7% (the prime lending rate plus 1 or 2%) and pay back the $10,000 value of the car.

Other Loans

It’s unusual to have other types of loans in Chapter 13 bankruptcy. If that’s the case, it’s likely that you’ve personally guaranteed a secure business loan. You’ll want to talk with a Chapter 13 bankruptcy attorney about your options.

Qualifying for Chapter 13 Bankruptcy

Chapter 13 bankruptcy will work only if you have enough income to cover your living expenses and catch up on past-due property balances. It doesn’t stop there, however. If you have “priority” debt, such as back taxes or unpaid support obligations, you’ll have to pay even more because your plan must provide for priority debt in full.

Example. After becoming sick, Rhianna fell behind on her car payment. She also owed $50,000 in unpaid taxes that she racked up after selling real estate during the last housing boom. She contacted an attorney about filing for Chapter 13 bankruptcy and learned that she’d need to pay all of her overdue taxes in a repayment plan (unless an exception allowed her to discharge taxes) because taxes have priority status in bankruptcy. Because her $2,000 per month income wouldn’t cover her monthly living expenses and the anticipated monthly plan payment of $950, the attorney advised her that she wasn’t qualified to file for Chapter 13 bankruptcy.

(To find out about the bills you must fully provide for in your plan, see Nondischargeable Debts: Debts You Can’t Discharge in Bankruptcy.)

There’s a good chance that you won’t need to pay all of your debt in full, however. You’ll pay unsecured debt—such as credit card balances and personal loans—with your “disposable income,” or, the amount left over after paying your living expenses, secured loan payments, and priority debt. If you have $100 of monthly disposable income, then the trustee will divide $100 among your unsecured creditors.

Example. Charles wanted to save his house from foreclosure but worried that he wouldn’t be able to afford a Chapter 13 repayment plan because of the $150,000 he owed in nondischargeable student loan debt. He met with a lawyer and learned that he could pay less on his student loans in a Chapter 13 plan than his usual payment. With more income available, he could catch up on his mortgage and keep his house.

Because certain debts receive different treatment in bankruptcy, proposing a workable repayment plan can be difficult, and most courts prefer that you hire local counsel to assist you when filing for Chapter 13 bankruptcy.

Questions for Your Attorney

  • I’m three months behind on my house, and I don’t make enough to fund a repayment plan—can I file for Chapter 13 bankruptcy if I get a second job?
  • Can I buy a new car while I’m in a Chapter 13 case?
  • What happens to my house or car if the court dismisses my case before I get my discharge?

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