What Happens to Your Car in Chapter 13 Bankruptcy in Michigan?

You wake up, check your phone, and there it is again. A missed call from the auto lender. The balance on your car loan seems to grow no matter what you pay. You are behind by two, maybe three months, and the threat of repossession is real. Here is something that may surprise you. Filing Chapter 13 bankruptcy in Michigan can actually be one of the most powerful tools available to protect your car, reduce what you owe on it, and stop the repossession process cold. Many Michigan residents file Chapter 13 specifically because of what it can do for a vehicle loan. 

This post explains exactly how that works, what the law says, and what you can realistically expect if you are trying to keep your car in bankruptcy in Troy, MI or anywhere else in our state.

How Does Chapter 13 Bankruptcy Actually Work?

Chapter 13 bankruptcy is a reorganization process. Rather than liquidating your property, you propose a repayment plan that lasts three to five years. During that plan, you make regular monthly payments to a bankruptcy trustee, who then distributes those funds to your creditors according to a priority system established by the Bankruptcy Code. At the end of the plan, remaining qualifying debts are discharged under 11 U.S.C. § 1328. 

This structure is fundamentally different from Chapter 7, where a trustee can sell nonexempt property to pay creditors. In Chapter 13, the trustee generally does not liquidate assets. Instead, under 11 U.S.C. § 1322(b)(5), you get the ability to catch up on missed payments over the life of the plan. That provision is exactly why Chapter 13 is so valuable for people who are behind on a car loan. 

The moment you file, an automatic stay goes into effect under 11 U.S.C. § 362. That stay immediately halts any collection efforts, including a pending repossession. Your lender cannot legally take your vehicle once that stay is in place without first getting permission from the bankruptcy court. If your car was recently repossessed and has not yet been sold, it may be possible to recover it through a motion for turnover once you file. 

Can You Keep Your Car in Chapter 13? What Michigan Law Says

Yes, in most situations you can keep your car in Chapter 13. But the answer depends on a few key factors. First, you need to know how much equity you have in the vehicle, because that determines whether and how exemptions apply. 

In Michigan, filers have a choice. You can elect to use either Michigan’s state bankruptcy exemptions or the federal exemptions, but you cannot mix and match between the two systems. Under Michigan’s state exemptions, found at MCL 600.5451(1)(g), you can protect up to a specified amount of equity in one motor vehicle, which is adjusted for inflation on a periodic basis under Michigan law. 

If you opt for the federal exemptions under 11 U.S.C. § 522(d), the motor vehicle exemption is $4,450, and this amount is also periodically adjusted for inflation under federal law. The federal system also includes a wildcard exemption that can be stacked on top, potentially shielding significantly more vehicle equity depending on your other property. Michigan’s state exemption system does not include a wildcard exemption. 

Because Chapter 13 does not involve the trustee selling property, the exemption analysis works a bit differently than in Chapter 7. You generally keep your car regardless of the equity amount, but if you have nonexempt equity, your plan must satisfy the “best interests of creditors” test under 11 U.S.C. § 1325(a)(4), meaning unsecured creditors must receive at least what they would have received in a Chapter 7 case. In other words, a higher-value vehicle with significant nonexempt equity may increase your required plan payments. That is still far better than losing the car entirely. 

What Happens to Your Car Loan in Chapter 13?

If you are current on your car payments when you file, you can generally continue paying the lender directly and keep the vehicle, depending on the structure of your confirmed plan and local practice in your Michigan bankruptcy district.

If you are behind on payments, Chapter 13 allows you to include the arrears in your repayment plan and pay them off over three to five years under 11 U.S.C. § 1322(b)(5). This is one of the defining benefits of Chapter 13 over Chapter 7. Chapter 7 has no mechanism to catch up on missed car payments, so a borrower who is behind will often risk losing the vehicle outside of bankruptcy protection. Chapter 13 directly solves that problem.

There is one more option worth knowing about for filers with high interest rates or loans where the balance exceeds what the car is actually worth. That option is a cramdown.

What Is a Chapter 13 Cramdown on a Car in Michigan?

A cramdown is one of the most beneficial features available to Michigan Chapter 13 filers who are underwater on a vehicle loan. When you owe more on your car than it is currently worth, a cramdown may allow you to reduce the secured portion of the loan to the car’s current fair market value. The remaining balance above that value is treated as unsecured debt, which is paid at a lower percentage in the plan and may not be paid in full depending on plan terms and disposable income requirements.

For example, if you owe $14,000 on a vehicle that is only worth $9,000, and you qualify for a cramdown, the secured claim would generally be reduced to $9,000 through your Chapter 13 repayment plan. The remaining $5,000 becomes general unsecured debt. When the plan ends, any unpaid portion of that unsecured debt is typically discharged, subject to successful completion of the plan. In addition to reducing the principal, bankruptcy courts typically reduce the interest rate on cramdown vehicles to a court-determined rate under the formula approach established by the Supreme Court in Till v. SCS Credit Corp., 541 U.S. 465 (2004).

The key statutory restriction is found in the hanging paragraph at the end of 11 U.S.C. § 1325(a). Under that provision, you generally cannot use a cramdown on a vehicle if it was purchased within 910 days before filing for bankruptcy. That is approximately two and a half years. The 910-day rule applies specifically to vehicles acquired for personal use that are subject to a purchase money security interest. If your car loan is less than 910 days old when you file, the lender’s claim is generally treated as fully secured for plan payment purposes, meaning you must pay the full loan balance through the plan to retain the vehicle. If the 910-day period has passed, a cramdown may be available if other plan requirements are met. 

There are also practical requirements for a cramdown to work. The secured portion of the reduced loan must be paid in full through the Chapter 13 plan, with interest at the court-determined rate. The bankruptcy court will not confirm a plan unless your income is sufficient to fund both the cramdown treatment and your other required plan payments. A qualified Michigan Chapter 13 attorney can analyze whether a cramdown is financially feasible in your situation. 

What If You Cannot Afford to Keep the Car?

Not every situation calls for keeping the vehicle. If the car payments are too high, if the vehicle is worth far less than the remaining loan, or if maintaining it would make your plan unaffordable, surrendering the car to the lender through the Chapter 13 plan is a legitimate option. In that case, you give up the vehicle, and any remaining deficiency balance after the lender sells it is treated as unsecured debt and is typically discharged upon successful completion of the plan. You are not left with a judgment chasing you after bankruptcy the way you might be outside of bankruptcy proceedings. 

Key Takeaways

There is a lot of information here, so a quick summary is worth having.

• Filing Chapter 13 triggers an automatic stay under 11 U.S.C. § 362 that immediately stops repossession.
• You can generally keep your car in Chapter 13, but nonexempt equity may affect plan payments under 11 U.S.C. § 1325(a)(4).
• Michigan allows use of state exemptions or federal exemptions in some cases. The Michigan motor vehicle exemption is found in MCL 600.5451(1)(g), and federal exemptions under 11 U.S.C. § 522(d) may include additional protection depending on eligibility.
• If you are behind on payments, Chapter 13 allows you to catch up through the plan under 11 U.S.C. § 1322(b)(5).
• A cramdown may reduce an underwater car loan to the vehicle’s value and adjust interest under Till v. SCS Credit Corp., 541 U.S. 465 (2004), generally only if the loan is more than 910 days old under 11 U.S.C. § 1325(a).
• Surrendering the vehicle is an option, and any remaining deficiency is generally treated as unsecured debt and may be discharged upon completion of the plan.

Frequently Asked Questions

Q. Can I keep my car if I am way behind on payments when I file Chapter 13 in Michigan?

A. Yes. Chapter 13 is commonly used to stop repossession and catch up on missed payments. The automatic stay under 11 U.S.C. § 362 stops repossession, and the plan allows arrears to be repaid over three to five years while you resume ongoing payments.

Q. What if my car was repossessed right before I filed?

A. If the vehicle was repossessed but not yet sold, Chapter 13 may allow recovery through a motion for turnover. Timing is important because rights may be lost once the vehicle is sold. 

Q. Does the Michigan vehicle exemption amount matter in Chapter 13?

A. It matters indirectly. You generally keep the car in Chapter 13, but any nonexempt equity must be accounted for under the “best interests of creditors” test in 11 U.S.C. § 1325(a)(4), which may increase plan payments. 

Q. Can I get a lower interest rate on my car loan through Chapter 13?

A. In cramdown cases, the interest rate is typically reduced to a court-determined rate under Till v. SCS Credit Corp., 541 U.S. 465 (2004). Outside of cramdown, interest rate changes are limited and depend on plan treatment and court practice. 

Q. Do I need a Michigan attorney to handle my car in a Chapter 13 case?

A. Chapter 13 is procedurally complex, involving plan confirmation, trustee requirements, and creditor objections. Local legal guidance can be important for properly structuring car loan treatment in the plan. 

Contact Hammerschmidt Stickradt & Associates

Your car is not just a possession. It is how you get to work, take your kids to school, and keep your life moving. If you are behind on payments, facing repossession, or simply drowning in an upside-down car loan, you do not have to accept the worst outcome.

At Hammerschmidt Stickradt & Associates, we represent clients in Walled Lake, Wyandotte, Troy, and throughout Michigan in Chapter 13 bankruptcy cases. We take the time to review your full financial picture, explain your options honestly, and build a plan that works for your actual life. Whether you need to stop a repossession today, explore a cramdown on an underwater car loan, or figure out whether Chapter 13 is the right path for you at all, we are ready to help.

Reach out to our office to schedule your free consultation. Your situation may have more options than you think.