How a Chapter 13 Bankruptcy Can Lower Your Car Loan
For many of our clients, their motor vehicle is their most valuable asset. If they own a home, then their car or light truck is typically their second-most important asset.
Unfortunately, motor vehicles lose value rapidly. It isn’t unusual to owe far more on a car loan than your vehicle is even worth. Interestingly, people who file for bankruptcy might be able to reduce their car loan using something called a “cramdown” procedure. However, our Plantation bankruptcy attorneys must work closely with our clients to get the timing right. A cramdown is not available to all consumers, so please schedule a consultation with a member of our team today.
Chapter 13 versus Chapter 7
In the typical Chapter 7 bankruptcy, a person with a car loan can “reaffirm” the loan. Basically, this means you can agree to remain liable for the debt, or you can turn your vehicle over (which serves as the collateral for the loan) and cancel the debt. Chapter 7 typically provides no room to renegotiate your interest rate or any other term.
Chapter 13 is different. With a cramdown, a debtor can often reduce their monthly payment, which makes keeping the vehicle more realistic. A debtor might also be able to negotiate a favorable interest rate. A cramdown is a type of “adjustment of debt” that is not available in Chapter 7.
How a Cramdown Works
A cramdown is possible when the value of the car is less than your car loan. Under Chapter 13, a debtor can separate their car loan into two parts—a “secured” part and an “unsecured” part. Put simply, the secured part will only be up to the value of your vehicle. The rest becomes unsecured, which gets lumped with other unsecured debts, like credit card debt. A Chapter 13 debtor typically pays back only a portion of their unsecured debt, so in practice many debtors are wiping out some of their car loan.
Cramdown is not available for all vehicles, however. Instead, Section 1325(a) limits this process to personal vehicles and excludes business ones.
Don’t File Too Soon
There is another important limitation on your ability to adjust your car loan. Specifically, your loan must be more than 910 days old (roughly 2.5 years). So you cannot take advantage of the cramdown feature if you drove your car off the lot recently.
Does this mean that you should delay filing for bankruptcy? You should discuss this question with your attorney. For one thing, you will not lose your car in a Chapter 13 even if you cannot avail yourself of a cramdown. You might find that you can afford your car payment going forward, which means you won’t lose the car.
Alternately, a Chapter 7 bankruptcy might make more sense. You could exempt the equity in the vehicle using bankruptcy exemptions. Or there might not be any equity in the car, so the trustee will not take it.
Ideally, you should meet with a Plantation bankruptcy attorney at Nowack & Olson PLLC to discuss this issue. Where a cramdown is available, we often recommend that our clients take advantage of it, but we must closely review all relevant circumstances first. Contact us to schedule a free consultation.