In general, you cannot. This is the trade-off: On the one hand you are allowed to modify the creditor’s claim, because you are allowed to stretch out the car payments up to 60 months. That is not a good deal for the car creditor. Under the original contract, he might have gotten paid within 30 or 36 months. Through the bankruptcy plan, the car creditor will have to wait much longer until he receives the full loan balance in most cases.

In addition, the car creditor does not receive the interest that is due based on the original contract. The debtor would pay the interest rate determined by the court. Often, the court’s interest rate (currently the interest rate for secured creditor is in St. Louis Missouri at 5.04%) is lower than the contract interest rate. It is not uncommon that we see contract interest rates of over 20%. In the cases in which the court interest rate is lower than the original contract interest rate, the car creditor will receive less from the debtor when he files bankruptcy.

Another modification is the “cram-down”. If the car was purchased more than 2.5 years ago the debtor is allowed to “cram-down” the car loan. That means he pays only the value of the car at the time of filing. Often, the loan balance is higher than the value of the car. In these cases, the car creditor is losing the portion of the loan that is above the value of the car.

In summary, the car loan is in some cases modified by the length of the repayment, the interest of the car loan, and often even by the loan amount when the debtor crams-down.
In return, the debtor should not be allowed to drive the car for let’s say 4 years under these favorable terms, and then be allowed to stop making payments and return it to the creditor. By then, the value of the car has depreciated and the car lender would have lost a portion of the money lent.

However, in some situations it might be possible to change the plan and surrender the car as long as the car creditor does not object and the trustee accepts a new plan. The chances are not very high. The car creditor has an interest in objecting to the surrender of the car because he would lose money.

In some situations, the car creditor would file a motion for relief after the debtor lists the car to be surrendered. The car creditor might also file a motion for relief if the debtor does not continue to insure the vehicle. After a creditor files a motion for relief, the creditor would no longer have ground for objecting to the debtor’s intention to surrender the car. Two things are important to remember the car creditor might agree to surrendering the car but might request that he is being paid the deficiency after selling the car. The second point is, even if the debtor filed a new plan that lists the car as being surrendered and the car creditor for some reason does not object, debtor’s attorney still would want to object to the creditors’ claim filed by the court. Without objection, the trustee might continue to pay the car creditor. In our district (Eastern District of Missouri), the trustee will pay based on claims filed, not according the confirmed plan.

Debtor’s attorney might also want to consider if the debtor can convert to a chapter 7. If the only reason for filing of the chapter 13 was to keep and pay the vehicle, it might be beneficial to convert to a chapter 7 if the debtor qualifies otherwise.

Often clients want to surrender a car because they hope this way they would lower their monthly plan payment. However, a confirmed plan can be modified to lower the plan payment only based on a change of circumstances, like loss of income. Surrendering a house or car to lower the monthly plan payment would not qualify as a change in circumstances. The trustee might object to the amended plan saying the debtor was able to afford the payment in the past and could continue to pay the same amount. The trustee would argue that it would not be good faith, if the debtor would not pay all of his disposable income to his creditors.

The foregoing applies only to surrendering a car, it does not apply to surrendering a house. Since a debtor is not allowed to modify a mortgage, the debtor will be able to surrender a house after confirmation. However, the good faith argument by the trustee might be an issue when surrendering a house and trying to lower the plan payment as well.