Does bankruptcy allow a person to lower their monthly payments on a newer vehicle? Good question, and one that was addressed in a recent Fox Business article.

Some may have the idea that bankruptcy can give one an option to "pay what you can," on a vehicle loan, but it isn't quite so simple. In a Chapter 13 bankruptcy, which is the closest thing to such an approach in the bankruptcy world, the filer will have a monthly payment over a three to five year period, depending on the filer's income and living expenses deemed acceptable by the court. That money will be paid to a trustee in charge of the filer's case, and the trustee will distribute that payment to some or all of the filer's creditors over the lifetime of the bankruptcy.

Sometimes it can work to have one's vehicle loan payment reduced. Because the loan is a secured claim, the lender on the vehicle loan will receive payment before other creditors, unless there are overdue state or federal taxes or delinquent child or spousal support payments. The balance on the truck would need to be fully paid over the bankruptcy period if the vehicle is less than 130 weeks old. As the article points out, the judge in charge of the bankruptcy could lower the interest rate on a vehicle loan, which could lower the payments, but if the interest rate is already very low it may actually increase.

Credit card, personal loans or other unsecured debt are included in the bankruptcy, but whether those creditors are to be paid depends on the monthly payment made to the court.

Several things to consider though, before rushing to file for bankruptcy in order to lower one's vehicle payments:

•· If one is in active bankruptcy for a long time, there might be an increase or decrease in income that would impact the size of one's monthly car payment during the bankruptcy period.

•· The cost of attorney and court fees should be considered. If the balance on the loan is small or the loan has a high interest rate, though, the monthly loan payment could drop significantly and easily offset those costs.

•· The state in which bankruptcy is filed also matters. Some states require the filer to give up future tax return refunds to the bankruptcy court. Every state and district has unique rules which should be explored.

There are a number of factors to consider in determining whether filing bankruptcy is the right path to take. An attorney should be consulted prior to filing to ensure one is making a wise decision.

Source: Fox Business, "A Bankruptcy Geared to Lower Car Payment?," Justin Harelik, 10 May 2011.