The Importance of Car Insurance in a Chapter 13 Bankruptcy

By Tracy L. Hirsch

If you have a car inside of your bankruptcy plan, car insurance isn’t optional.

If you’ve recently filed for a Chapter 13 bankruptcy, or are considering it, it’s important to know how to budget for monthly expenses.

If money is tight, it’s always good to cut out things that aren’t necessities, such as subscription accounts (Netflix, Spotify, etc.), as well as daily trips to the drive-thru at Starbucks.

While you’re purging those extras, you may be tempted to get rid of your car insurance too. You might be thinking that allowing a lapse in coverage for a couple of months (or even years) isn’t that big of a deal. I mean, it’ll save you tons of money, right?

Unfortunately, the answer to that question is ‘no.’ While it may seem like you’re saving money by not paying for auto coverage, you’re actually putting yourself at risk of losing your main mode of transportation.

In other words, if you don’t pay for car insurance, you will be at risk for losing the car itself!

How is that possible?

The Risk of Losing Your Car

When you’re in an active Chapter 13 bankruptcy in Kentucky (or any other state), your car loan lender can repossess your car if you aren’t insuring that car.

The bankruptcy court requires debtors to have full-coverage auto insurance if money is owed on a car. (A full coverage insurance policy includes collision and comprehensive coverage.) If your car loan lender finds out that you don’t have full coverage, they can object to your bankruptcy plan.

Here’s what that means:

Your lender will basically tell the court that they (the lender) should have the right to take back the car since it’s not being protected through an insurance policy.

Bottom line: Don’t stop paying for your car insurance.

The lender’s argument is that if you were to get into an accident and damage or total the car, they would lose thousands of dollars since there’s no insurance to cover the damage, and the debtor doesn’t have any money to cover the damages from their own pocket.

If your car loan lender submits an objection to the court, the court will give you a 10-day grace period to obtain full auto coverage. If you don’t obtain that coverage within that timeframe, the court will provide relief to your car loan lender.

This means that your car is no longer protected as part of your Chapter 13 bankruptcy plan, and your lender can legally take your car from you.

The Consequences of Losing Your Car

It’s important to understand how losing your main mode of transportation could cause you to lose money in the long run. If you don’t have a car, you’ll have to use public transportation to get to work, school, and the grocery store.

While riding a bus may work out well for people who live in the city, your residential area may not be close to a bus line.

That means that you might not be able to get to work or your kids’ daycare, or to go out to get food, medication, and other necessities. If you’re unable to get to work, you’ll lose your paycheck, which could lead to losing your home if you don’t have enough money to pay your mortgage.

Without a job, you won’t be able to pay your other monthly bills either, such as food and utilities.

Depending on your situation, you could experience a negative domino effect if your car gets taken away from you. Look at this way: paying your monthly car insurance bill could protect you from disaster, and it will keep you in good standing with the bankruptcy court.

It’s a win-win, and is a vital component in successfully completing your Chapter 13 plan.

How to Set Yourself Up for Success

If you’re currently in a Chapter 13, and are having a hard time paying all of your monthly bills, contact your Louisville bankruptcy attorney immediately, as they can review your budget with you, and try to think of ways to help you stay on track.

If you’re currently at risk of losing your car, your home, or the money in your bank account due to a judgment lien or wage garnishment, there is hope! I offer free case evaluations, and will talk with you over the phone to see if bankruptcy is a good option for you.

I can be reached directly on my cell phone at (502) 435-2593. You can text or call me, and we can discuss your financial situation, and come up with solutions to get you on a path to financial freedom.

Just remember that bankruptcy is set up to help you, not harm you… And I’m here to help you too.

All the best,

Tracy L. Hirsch

Louisville Bankruptcy Attorney

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