Updated: Mar 24
It is not uncommon for a car that you are making payments on through a Chapter 13 bankruptcy to be totaled during the Plan term.
First, it's important to make sure that you ALWAYS have full insurance on your vehicle so that the lien on the vehicle can be paid off if the car is totaled before paying off the loan, this is true whether you are in bankruptcy or not!
When a vehicle is totaled during bankruptcy, the insurance check will need to go to the Chapter 13 Trustee to pay off any amounts remaining on the lien. If there are any additional amounts remaining after the lien has been paid off, you must file a request to receive a refund of these amounts from the Trustee to apply to a new vehicle. See separate article here about purchasing a vehicle with financing during a bankruptcy case.
Second, most bankruptcy cases that include car payments have modified those car payments by either lowering the interest rate or extending out the payments over the life of the plan. This means that your vehicle may not be paid off, even if you normally would have had the vehicle paid off by a particular date. Additionally, since most cases modify the loan terms of a vehicle, the lender is NOT required to release the lien until the case is discharged (successfully completed).
Let's look at two examples:
Example 1: Sarah has a 2018 Malibu that she is making payments on through her Chapter 13 Plan. She still owes $10,000.00 on the loan to ABC Credit Union. She gets into an accident and the vehicle is totaled. Her insurance company, Good Insurance, has told her they will be paying out $12,000 for the wreck. This check must go to the Trustee, who will pay ABC Credit Union $10,000 first. Sarah decides she will purchase a replacement vehicle for cash and makes a request to the Trustee for the remaining $2,000 to put towards a cash vehicle payment.
Example 2: Edward has a 2019 Ford Fusion that he has been paying through his bankruptcy. Before his bankruptcy, his loan was at 15% interest and through his bankruptcy, the interest was lowered to 8%. Edward totals his vehicle and demands a lien release. The Lender refuses to release the lien because Edward has not successfully completed his case yet to lock in the benefit of his 8% interest rate.
It's important to remember:
Insurance claims take time, so you will not receive cash right away and the lien may not be paid off right away to the Trustee.
Sometimes, insurance may not be enough to pay off the lien, so you may not receive any payout at all. (make sure your insurance coverage is sufficient for your needs!)
You must make a separate request to the Trustee/Court to receive any refunds at all. To do this, you must show where these funds are going to go.
Financing a vehicle during bankruptcy can be difficult and interest rates will be high. If it's at all possible, buy a vehicle with cash during bankruptcy.
If you've been injured in your accident, let your Attorney know.
Attorney Allison Greenlee Korr handles cases in Kalamazoo, Battle Creek and all surrounding counties, call today for a consultation. 269-381-4471