Chapter 13 "adjustment of debts" is an incredibly good tool for dealing with many situations, often much better than Chapter 7 "straight bankruptcy." If you owe income or property taxes, are behind on child support or your mortgage, have a second mortgage or vehicle loan you have trouble paying, or any other situation not handled well by Chapter 7, you definitely want to check out the potential benefits of Chapter 13.
HOW FLEXIBLE OR RIGID IS CHAPTER 13 GENERALLY?
The immediate downside of Chapter 13 is that it generally lasts 3 to 5 years—in contrast to the 3 to 4 months that most Chapter 7s last. That much longer length of time can actually be a benefit—giving you more time to pay some crucial debt or two while under the protection of the bankruptcy laws. Nevertheless, before going into such an extended program it's wise to find out how flexible it is in dealing with financial and other changes in your life that could happen while you're in it.
Chapter 13 is flexible in many ways. The court-approved "plan" can usually be amended during the course of the case to reflect changed circumstances, especially if the changes are moderate. If your financial circumstances change significantly, you can almost always convert your case into a Chapter 7 one. Or you can dismiss (end) your case voluntarily, if you don't need it anymore or if you need to file an entirely new case. Under limited circumstances, you can end your case early and get a "hardship discharge," a more limited write-off of your debts.
HOW ABOUT FLEXIBILITY IN CHAPTER 13 ABOUT VEHICLES?
Practically speaking, there is often nothing more important in our day-to-day lives than our vehicles. So it can be very important to know in advance how flexible is Chapter 13 about getting another vehicle if your current one is in an accident, or needs major repairs costing more than the vehicle is worth. This blog post looks at a few of the most common scenarios.
CAN CHAPTER 13 ANTICIPATE MY NEED TO MAKE REPAIRS ON MY PRESENT VEHICLE?
Before getting into how Chapter 13 handles the unexpected, can Chapter 13 help you avoid having to get a new vehicle by giving you the money to keep your present one in reliable and safe condition?
People contemplating bankruptcy have often gone for many months or even years deferring maintenance and repairs on their vehicle(s). It may be the best for you (and perhaps for your creditors, too) to be able to put money into getting the vehicle you now have in decent condition and keeping it that way for the next few years. Assuming that your vehicle is necessary for you to go to work and be able to pay your creditors under the Chapter 13 case, we may be able to put extra money in your budget so that you can pay for the necessary repairs, if it's worthwhile to do so.
CAN CHAPTER 13 ANTICIPATE MY NEED TO GET ANOTHER VEHICLE?
What if you know from the beginning of your Chapter 13 case that you will need to buy a vehicle soon? Your present car may be on its last legs and just not worth repairing. Or you and your spouse may own one car and you are getting or trying to get a job which will require a second car. You may even know about a decent vehicle you could buy if you could just pull together a few thousand dollars.
Under the right circumstances, we may be able to earmark money during the beginning months of a case for that vehicle purchase. This may be especially feasible if you have an income tax refund that could pay for a substantial portion of the purchase price.
WHAT IF I UNEXPECTEDLY NEED TO BUY A VEHICLE ON CREDIT?
You may be able to incur new consumer debt during the course of a Chapter 13 case (other than for a medical emergency) but only after getting the bankruptcy court's permission to do so. The Chapter 13 trustee cannot give this permission.
Chapter 13 plans must include the following language:
The Debtor shall incur no debt greater than $500.00 without prior court approval unless the debt is incurred . . . for medical emergencies.
The reason you are generally not permitted to incur new debts during your case is that the Chapter 13 is intended to deal with your prior debts. So you are generally only allowed to incur a new debt to finance a vehicle (or anything else) unless it is truly necessary, and indeed will help you pay your prior creditors, such as enabling you to commute to work and have an income.
To get the necessary court permission for the use of credit, your attorney would prepare and file in court a Motion for Authority to Incur Debt, laying out in detail the circumstances why such a purchase is necessary. An updated declaration of your income and expenses would accompany this Motion to show the financial impact of the purchase.
Whether or not the court would give its permission turns not just on whether you genuinely need the vehicle, but also on whether your Chapter 13 case will continue to be feasible after the purchase. For example, if your original plan required you to use every available dollar to pay "priority" tax debts and/or to catch up on your mortgage arrearage, which must be paid in full before the completion of your case, you may not have room in your budget for an unexpected monthly vehicle payment. However, your case may be extended over a longer period (up to a maximum of 5 years), or some other adjustments may be available to make the vehicle purchase possible.
WHAT IF THE PURCHASE IS NECESSARY BECAUSE MY CAR IS TOTALLED IN AN ACCIDENT?
If you need to buy and finance a vehicle because yours was totaled in an accident, that presents a number of other issues.
In general all income, including insurance proceeds, is under the jurisdiction of the bankruptcy court, through your Chapter 13 trustee. This can get complicated by what the insurance proceeds are intended to pay for, if you have medical bills to be paid or lost wages to be reimbursed.
But focusing for the purposes of this blog post on insurance covering the value of your totaled vehicle, you will almost certainly be given permission to use that money to attempt to replace the vehicle. The practical problem is often that the fair market value of your vehicle—which is all that the insurance company will pay you—will not be enough to buy a comparable vehicle. It may only be enough for a down payment on a replacement vehicle, with the rest of the purchase price needing to be financed.
Perhaps most important on a practical level, be sure to inform your bankruptcy attorney immediately as soon as your vehicle is in an accident, even if the situation is very unsettled at that point. If you have to lose time from work, or have new liabilities from the accident (including if you are partly or completely at fault for causing it), these are issues that your attorney needs to know about without delay because of their potential major effects on your Chapter 13 case.