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Chapter 13 Vehicle Loan Cramdown – Revisited

A Chapter 13 car loan cramdown can dramatically reduce your monthly vehicle loan payment and lower the total amount you owe. Last month we covered the technical requirements of a cramdown. Today, I’ll give an example of the “power” of the cramdown.

Chapter 13 Cramdown

The cramdown is a very useful tool for reducing the cost of your vehicle loan. A cramdown can usually offer the following benefits:
1. Lower your monthly vehicle loan payment – sometimes significantly
2. Reduce the total amount of your contractual payment overall – often by thousands of dollars
3. Relieve you from the arrears burden from catching up on missed payments

A Typical Cramdown Fact Example

Assume you are currently making payments on a 2015 Ford Fusion SE that you purchased new more than 3 years ago. When you purchased from the dealer, it cost you $27,000. After fees and taxes and subtracting your down payment, you financed $27,000. Your credit wasn’t perfect so your loan was at an 8.9% interest rate for 84 months.
Your monthly payment of $433 has been a struggle to keep up with each month. You didn’t make last months payment yet and next months payment is due next week. You can just feel the repo man starting to stalk you and realize it’s just a matter of time before you’ll be bumming rides or walking.
You’ve made 34 monthly payments of $433 and owe approximately $18,000 on the loan, plus another $1,000 in late charges. This brings the total you owe to $19,000. However, the Blue Book value for your car with 55,000 miles is only $13,000.

UNDER CHAPTER 7 “STRAIGHT BANKRUPTCY”

If you were to file a Chapter 7 bankruptcy case you’d have two choices. Either keep the car with all its present terms and conditions or surrender the car and write off the loan.
Assuming that you have no other means of transportation and aren’t that fond of walking, you’d have to “reaffirm” the loan. That would entail catching up on any missed payments and agreeing to remain current going forward. You’d still have that high interest rate (costing you about $9,000 over the duration of the contract). If you failed to continue to make payments and your vehicle got repossessed, you’d be stuck owing a large deficiency balance. Plus, you’d be back to walking.

CHAPTER 13 CRAMDOWN SAVINGS

Under Chapter 13 bankruptcy both your monthly car payment and the total amount paid would be reduced.
In the example above, your lawyer would be able to reduce your payment as follows. The $19,000 balance remaining on the vehicle contract would get divided into the secured and the unsecured portions.
The secured portion is based on the current appraisal or Blue Book value of $13,000. The Chapter 13 Plan gives you 3-5 years to pay that amount. Depending on the circumstances you should also be able to reduce the interest rate – assume down to 4%. $13,000 amortized at 4% over 60 months works out to a new car payment of about $239 per month.
WHAT HAPPENS TO THE UNSECURED $6,000 AMOUNT?
The remaining unsecured amount of $6,000 gets lumped in with the other “general unsecured” debts. And what happens to that depends. In most situations the $6,000 unsecured debt does nothing to your Chapter 13 repayment plan.

0% CHAPTER 13 PLANS

First, after paying all allowed living expenses and higher priority debts—including the monthly car payment of $239 and also recent income taxes, home mortgage and support arrearage, and such—you may have nothing left over for the general unsecured debts. Under these circumstances you’d be paying 0% on these debts during your Chapter 13 payment plan. Then at the end of the 3-to-5-year plan those general unsecured debts would be discharged—completely written off. This would include the $6,000 unsecured part of the vehicle loan. You’d pay nothing on it (and still get to keep your vehicle).

PARTIAL PAYMENT CHAPTER 13 PLAN

Second, you may have some money left over during your plan to pay towards your general unsecured debts. But usually that payment, if any, is only pennies on the dollar.
To clarify this example, let’s add a few more facts. Assume that you have $40,000 in other general unsecured debts (credit cards, medical bills, old income taxes, and such). Add the $6,000 unsecured part of your vehicle loan, for a total of $46,000 of general unsecured debts. Assume also that over the course of your Chapter 13 plan you have disposable income (after allowed expenses and higher priority debts) totaling $4,000. You pay that $4,000 over time through your monthly plan payments.
If you didn’t owe the $6,000 unsecured part of your vehicle loan, that $4,000 would result in you paying 10% of your general unsecured debts ($4,000 out of $40,000 owed). When you include the $6,000 unsecured part, the $4,000 paid would result in you paying about 8.7% of your general unsecured debts ($4,000 out of $46,000 owed). But either way you’re paying what you can afford to pay—$4,000 over the life of your case. The existence of the $6,000 unsecured part of the vehicle loan has no effect on how much you pay. What you actually pay just gets distributed a little differently. The other general unsecured debts get paid a little less so that the $6,000 debt receives a small part of the $4,000.

GENERALLY, MOST CHAPTER 13 PLANS DO NOT PAY MORE BECAUSE OF UNSECURED PART OF CAR LOAN

This happens in most cases that are not 0% plans (as discussed above). The only way that an unsecured part of a vehicle loan would increase the amount you pay in your plan is if you have disposable income larger than your other general unsecured debts. In the example, you’d have to have more than $40,000 of disposable income available to pay during your plan. Only then would the addition of the $6,000 unsecured part of your vehicle loan to the general unsecured creditors increase what you would have to pay. That situation is uncommon. Most people don’t have disposable income during their case larger than their non-vehicle general unsecured debts.

DO I QUALIFY FOR A CRAMDOWN?

Remember that cramdown is only available in Chapter 13 “adjustment of debts.” Not Chapter 7 bankruptcies. Also, to qualify the vehicle loan must be at least 910 days old (about 2 and a half years) when filing the Chapter 13 case. And finally, cramdown is beneficial for most purposes only when the vehicle is worth less than the balance on the loan. The more it’s worth less, the greater the likely benefit of the cramdown will be. To discuss cramdown with a licensed NJ bankruptcy attorney call Pikunis Law at (856) 282-5505.

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