In my past few blogs, I’ve discussed the benefits of Chapter 13 bankruptcies. In my last blog, I referenced a major tool that can help you keep your home, the lien strip. But did you know that there is also a mechanism that can help you keep your car as well? When you file for bankruptcy under Chapter 13, you can reduce the amount you pay on your car and reduce the interest rate through a process known as a “ cram-down."
A Chapter 13 bankruptcy does not require you to pay the loaned amount of your vehicle, just its fair market value. As an example, if you purchased a car 3 years ago, and you owe a total of $20,000, but it’s currently only valued at $10,000, a cram-down would allow you to pay just $10,000 over the life of your Chapter 13 bankruptcy. This could be the solution that allows you to keep your car!
How Chapter 13 Cram-Down Works
When filing a Chapter 13 bankruptcy, you will be required to pay back a portion of your debts over a 36 to 60 month period (3 to 5 years). This would be at a set interest rate by the court (which is typically significantly lower), so you can adjust your interest rate and the duration of the loan as well as your principal payments. Payments are administered through monthly payments to a bankruptcy trustee. A portion of that monthly payment would be the payment for your car.
Some people have asked, “How is this even possible?" The answer is simple: every Chapter 13 bankruptcy case includes a liquidation analysis. This begins with the question, “What would the creditors receive if all the assets were sold on the day the creditor filed for bankruptcy protection?" The answer: the creditor would receive the fair market value of the vehicle. So, since the creditor would only be getting the value of the car if they were to repossess it, it is in the creditor’s best interest to accept the Chapter 13 cram-down and let the debtor keep it at a reduced rate instead of looking for a new buyer.
Limitations to Chapter 13 Cram-Down
The main catch to the cram-down is that you must have purchased the car at least 910 days (2 ½ years) prior to filing your Chapter 13 bankruptcy. If you bought the car more recently, you will not be able to take advantage of the cram-down. However, you will still be able to take advantage of the interest rate reduction set by the court, allowing you to save money on your car loan.
Cram-downs are not limited to cars. You are allowed to cram-down loans on boats, RVs, ATVs, and many other secured debts. Be advised, cram-downs are not available on home loans for primary residences.