I have heard from two different people looking for relief from their debt that they thought they could not discharge their car loan debt in a bankruptcy. In fact, one person said they had consulted an attorney on this very issue and they were told they could not discharge their car debt in a bankruptcy even though the vehicle was already repossessed. The source of the myth is one of the reforms that occurred to the bankruptcy code in 2005. The change was that if you had purchased a vehicle within 910 days (about 2.5 years) prior to filing your bankruptcy petition, that purchase money debt secured against the vehicle could not be "crammed down". Cramming down a debt is where the amount of the debt secured
against property, such as a car, is reduced to the value of that property on the date of filing the petition. For a car, you may owe $15,000.00 but the vehicle is only worth $10,000.00. That debt could be crammed down so that you would have to reaffirm (agree to pay) only $10,000.00. Under the old law, the $5,000.00 debt above the value of the car was discharged. The change in the law prevents this from being done on cars purchased within 910 days. However, what did NOT change is that the debt of a car loan can be discharged. If your car was repossessed or if you surrender it, then the whole remaining debt will be treated as unsecured and will be discharged. If you keep the car and you purchased it over 910 days prior to the bankruptcy you may want to consider a Chapter 13. In the Chapter 13, you propose a plan that includes valuing a car secured by a debt. You suggest what you believe to be the value of the car. The creditor can challenge that, but usually a compromise is reached. You then only pay the value of the car in the Chapter 13 while the rest of the debt's principal is treated as an unsecured debt. Any remaining unsecured debt after the plan payments are paid in full gets discharged. In a Chapter 7, if you have the resources, you could attempt to redeem the vehicle at its fair market value. This hardly ever occurs, however, because few debtors have the resources to pay a lump sum sufficient to redeem a vehicle. So, most debtors either have to reaffirm the debt for the full debt or surrender it. The Chapter 13, then, offers the most viable option to cram down debt on a car.