Car loans are one of the tricky types of loans to get discharged in bankruptcy. The reason is that they are secured loans, meaning the car itself is secured against the loan as collateral. If you default on the loan the creditor can repossess the car in efforts to satisfy the debt. Car loan debts are difficult to have discharged in a Chapter 7 case, but can usually be managed through a Chapter 13 repayment plan.
Chapter 13 bankruptcies can help alleviate secured debts, but come with some additional considerations. In the past a person could split their debt into both a secured debt claim and unsecured debt claim, making it easier for the unsecured portion to be eliminated. For example, if a person owed $20,000 on a car loan but the car was only worth $10,000, the person could split the $10,000 difference between the value and what was owed into an unsecured debt claim.
The 910 Day Rule
Prior to the change in laws in 2005, anyone who owed a debt on a vehicle could split the debt claims when filing a Chapter 13 case. However, Congress passed a law in 2005 that prohibited this split of debt claims for anyone who did not own the vehicle for 910 days or more. Therefore, only those who own a vehicle for 910 days or more are allowed split the debt into a secured and unsecured portion.
The 910 Day rule allows for a person to only be responsible for repaying the secured potion of the debt when filing a Chapter 13 case. However, there is still help available for those who have not owned their vehicle for more than 910 days. If your car loan is less than 910 days old and you file for Chapter 13 bankruptcy, you cannot split your debt claims, but you can have your interest rate lowered on the loan. The interest rate reductions can save thousands of dollars when repaying the secured debt payments.