Do you owe more money on your car than it is worth? You may be able to use a Chapter 13 bankruptcy “cramdown” to reduce the balance and interest rate on your car loan.
What Is a Car Loan Cramdown?
As soon as you drive your car off of the lot, it depreciates very quickly, especially if it was new. This means you may end up with a car loan balance that is greater than what your car is worth. However, you may be able to reduce your loan balance payment down to the value of your car through a Chapter 13 bankruptcy. This is a cramdown.
How Does a Cramdown Work?
Cramdowns are only available in Chapter 13 bankruptcy — you cannot cram down a car loan in Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, you propose a repayment plan to pay back your creditors over a three to five year period. In your plan, you have the ability to propose that your car lender receive only the value of your car instead of the entire loan balance if certain conditions are met.
For example, say you took out a $20,000 loan to buy a car in 2012. Now it is 2015 and the car you bought has depreciated in value to $6,000 but your loan balance has only gone down to $11,000. This means that only $6,000 of the loan is “secured” because if the lender repossessed your car and sold it, the lender would only receive $6,000 (this is the car’s replacement value). This is where a cramdown can help you.
In your Chapter 13 plan, you can propose to pay only the replacement value of the car to your lender. So, you can cramdown the balance of your loan to $6,000 (the value of your car) and tell your lender this is all you are going to pay.
What About The Remaining Balance of My Car Loan?
What happens to the unpaid portion of your loan? It will receive the same treatment in your Chapter 13 plan as your other nonpriority unsecured debts. Since most Chapter 13 plans pay little or nothing to these creditors, this means that your car lender will likely receive nothing or pennies on the dollar on the remaining balance of your loan. At the completion of your plan, any unpaid balance of the loan will be discharged and you will own the car free and clear.
Additional Benefits Of A Cramdown
When you cram down a car loan in Chapter 13, the law also allows you to lower your interest rate. The interest rate will generally be the prime rate plus a little extra. In almost all cases, this will be lower than your original car loan rate.
Criteria On Using a Car Loan Cramdown
The criteria for a chapter 13 cramdown is as follows:
1. You can cramdown any commercial or non-personal vehicle;
2. You can cramdown a personal vehicle if the financing was obtained at any time, other than at the time of purchase;
3. If auto was purchased with financing for personal use, the purchase must be at least 910 days prior to the filing date.
To learn more about a cramdown call Pikunis Law (856) 282-5505