Question on Using Car As Collateral

[Morcant]

Hello,

I have a question regarding Chapter 13 exemptions and car payments. My wife and I had an appointment with a lawyer and she said we qualified for a 13 but not for a 7 (too much income). She said our payment would be around $1,250, but if we had car loans, it would drop the payment by $500 for each vehicle, due to the deduction. We had no payments at all before. I qualified for a loan on a used vehicle, which we purchased last month.

We have another vehicle that we own that's paid off. I'm not really interested in buying another used vehicle for many thousands of dollars because it would just sit there. I use my work vehicle for all my driving. She said we could take out a loan using the car as collateral. It's probably worth $2,500 at best, but it needs repairs now. Is this possible? I read online that this kind of loan is looked down upon and has high interest rates. Is this possible?

[mountanddo]

What would you do with the $2,500? If you did this that would mean you would have two car payments reducing your monthly DMI from $1250 to $250? ($500 for each car). What happens after you pay off the car loans? Would your payment go up to the $1250 again? I suppose that if the money was used for living expenses or some reasonable expense such as house repair that would make sense. It is difficult for me to understand how spending more money and having more debt before you file chapter 13 puts you in a better spot but I suppose in this instance it may. I wish that I had planned a little better before I got into the situation where I had to file just to stop judgements and garnishments because I really, really need a new car.

[Morcant]

Well, my X-Terra had 215,000 before it croaked. I ended up donating it because the repairs would have been more than what the car was worth. I bought the used car to replace that one. My other car has 175,000 miles on it. That's the one I'm considering using as collateral, basically to repair it. I don't want anywhere close to a $500 payment for that one. I'm basically trying to get my payment down by picking up another payment. I'd rather pay $500-$700 (or less) for two payments than the $1000 without deductions. I wouldn't even want to take out $2,500. If I could take out a $500 loan using the car I would...

It's really ridiculous. I want to take out a loan as small as possible using my car as collateral to get my payment down as far as possible. That's not one of the better decisions the Supreme Court has come up with.

[ValleYum]

Well, my X-Terra had 215,000 before it croaked. I ended up donating it because the repairs would have been more than what the car was worth. I bought the used car to replace that one. My other car has 175,000 miles on it. That's the one I'm considering using as collateral, basically to repair it. I don't want anywhere close to a $500 payment for that one. I'm basically trying to get my payment down by picking up another payment. I'd rather pay $500-$700 (or less) for two payments than the $1000 without deductions. I wouldn't even want to take out $2,500. If I could take out a $500 loan using the car I would...

It's really ridiculous. I want to take out a loan as small as possible using my car as collateral to get my payment down as far as possible. That's not one of the better decisions the Supreme Court has come up with.

Actually, it was Congress you have to thank for bankruptcy reform. Ugh. Lovely of them, wasn't it?

The car that has 175k miles on it - will it last the 5 years of your Chapter 13? I see you mentioned a work vehicle - but what if your job changed and you need to provide your own transportation?

I think the decision about buying a car is not only about lowering your disposable income, but about making sure you are in the best shape you can be prior to filing. From what I understand, it is quite the fun time getting Trustee approval to acquire new debt if you need to buy a car during your BK. It is also much more difficult to find a lender while in the midst of a BK.

Just my opinion. Good luck!!!

[Morcant]

Yeah, the car would be fine to get through the five years.

What it boils down to is that I basically want a payment on that car again so that my C13 payment can be lowered. Which is why I was asking about using the car title to take out a small loan, even if it's $500.

[ValleYum]

But $500 over 60 months would only reduce your disposable income by a little over $8 per month.

You have to take the total amount of the loan and divide it by the number of months of your Chapter 13 plan to figure out how much it *should* reduce your disposable income. As always, check with your lawyer!

[mountanddo]

But $500 over 60 months would only reduce your disposable income by a little over $8 per month.

You have to take the total amount of the loan and divide it by the number of months of your Chapter 13 plan to figure out how much it *should* reduce your disposable income. As always, check with your lawyer!

Also, wouldn't the trustee see that it is just a small loan and then raise the payment after it is paid off? I am not understanding the OP's math in that if he has two car payments it would lower his original C-13 payments from $1250 to $250 a month. Sounds a little too good to be true.

[Morcant]

That's what my lawyer told me.

Part of me just says forget it.

[ValleYum]

Also, wouldn't the trustee see that it is just a small loan and then raise the payment after it is paid off? I am not understanding the OP's math in that if he has two car payments it would lower his original C-13 payments from $1250 to $250 a month. Sounds a little too good to be true.

Payments due on secured debt reduces disposable income is how I understand it.

[momofthree]

Sounds to me as if the attorney is referring to the means test lines where an auto loan payment is deductible from DMI. If you have a loan--any loan--on a vehicle, you get to claim the IRS standard payment on the means test, which is around $496 per vehicle. HOWEVER, you only get to claim the ACTUAL payment on schedule J, so it may not reduce your BK payment much at all if you take out a small loan.

That said, you need to look at this logically. You say that this high-mileage $2500 car will last you 5 years, and that may very well be true. BUT, your outgo will be the same whether you buy a new vehicle or not, so you may as well buy the new vehicle now rather than completing your 13 will a beater car and then having to buy a new vehicle as soon as you finish your plan.

This can be confusing at first, but here is how the math works:

~no car payment = bk payment of $1250 with beater cars that will need replacing as soon as your plan ends.
~OR~
~2 car payments of around $500 each = $1000 in car payments + bk payment of $250 (same $1250 outgo as above), but at the end of your ch.13 plan, you still have 2 newish cars that don't need replacing, and you are in a better financial position.

Take your attorney's advice and buy 2 new vehicles. It literally will not cost you more money! It sounds crazy, but it's true!

[mountanddo]

That makes much more sense to have a car payment each month not just when you file. If I were you I'd jump on that bandwagon. I have a 16 year old car and will not be able to squeeze any money out for a car payment. My only hope is to be able to save enough to buy another beater should this one break down and hope that one lasts. The good news is that my attorney told me that if I did get a raise that was big enough to cover a car payment then I most likely would get trustee approval to buy a car.