Montgomery AL attorneyHaving a wreck is terrible….having a wreck while in Chapter 13 is even more horrible!

Unfortunately, this is a common scenario for our clients.  One solution for clients (not all bankruptcy courts allow this) is to swap out the collateral using the insurance proceeds received from the wreck.  This process can be confusing to explain but this is how it works.

Swapping Collateral Using Insurance Proceeds

You have insurance with the ABC Insurance Company.  After your wreck, you immediately notify your insurance company.  They will process your claim and determine if the vehicle can be repaired or if it is a total loss.  If it can be repaired, great!  If it is a total loss, they will pay the value of the vehicle to the lienholder.  The lienholder would release the title on the wrecked car upon receiving the insurance proceeds.  Our office would then (if the court in which your case has been filed allows) file a motion with the bankruptcy court asking that the lienholder pay the insurance proceeds it received to the dealer where you want to purchase another car.

The catch is that you only have the insurance proceeds to work with for the purchase.  So if ABC Insurance Company paid $14,500 for your loss and you found a car at a dealer for $15,000, you would have to pay $500 out of pocket for the sale to be completed.  The lienholder would then get a lien on the replacement car purchased from the dealer.  Hence, you are swapping out the wrecked car using the insurance proceeds to pay for the replacement car.  The lienholder would continue to be paid for through your Chapter 13 plan as filed.  The benefit of this is that you will not have incurred a NEW debt that would have to be paid outside your Chapter 13 plan.  It is not an easy or fast process but provides needed transportation for Chapter 13 clients to get to and from work.

Please call one of our Bond & Botes offices today if we can help you or your family with any of your financial problems.


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Gail Donaldson
Written by Gail Donaldson

Gail Hughes Donaldson is a Managing Partner of the Bond & Botes Law Offices in Montgomery and Opelika, Alabama. She holds a Bachelor of Science from Auburn University at Montgomery, and a Juris Doctorate from Thomas Goode Jones School of Law. She’s been helping families work through the bankruptcy process since she started with Bond & Botes back in 1993 as a paralegal. Read her full bio here.

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