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Qualify for a Vehicle Loan “Cramdown” by Filing Your Chapter 13 Case at the Right Time

Posted by Kevin on November 2, 2019 under Bankruptcy Blog | Be the First to Comment

Potentially save thousands of dollars on your vehicle loan by filing bankruptcy when it qualifies for cramdown.

Chapter 13 Vehicle Loan Cramdown

What’s a “cramdown”? It’s an informal term—not found in the federal Bankruptcy Code—for a procedure provided under Chapter 13 law for legally rewriting the loan to reduce, usually, both the monthly payment and the total you pay for the vehicle. A cramdown, essentially reduces the amount you must pay to the fair market value of your vehicle, often also reducing the interest rate, and also often stretching out the payments over a longer period. These combine to result often in a significantly reduced monthly payment, and an overall savings of thousands of dollars.

Qualifying for Cramdown

First, this only works if your vehicle is worth less than the balance on the loan.

Second, emphasizing again, it is ONLY available in a Chapter 13 case, not Chapter 7.

And third, your vehicle loan must have been entered into more than 910 days (slightly less than two and a half years) before your Chapter 13 case is filed.

Vehicle Cramdown

It’s of course that last condition that creates the timing opportunity. When you first go in to see your attorney, bring your loan vehicle paperwork (or as much information you have) to see if and when you qualify for cramdown, and whether and how much difference it can make for you.

Here’s an example of the dollar difference that a difference in timing can make.

How Good Timing Can Work for You

Let’s say you bought and financed your car 890 days ago—that’s almost two and a half years. The new car cost $21,500. You did not get a very good deal; your previous car had died and cost way too much to repair, and you had to quickly get another car to commute to work. You put down $500 (from a credit card cash advance), then financed the vehicle for $21,000 at 8% over a term of 5 years, with monthly payments of $425.

Now almost two and a half years later you owe about $11,500. If you wanted to keep the car, and filed either a Chapter 7 or Chapter 13 case before the 910-day mark, you would have to pay the regular monthly payments for the rest of the contract term. With interest, that would cost a total of about $12,650 more.

Consider if instead you waited until just past that 910-day mark and filed a Chapter 13 case then, and could “cram down” the car loan. Assume that your car is now worth $7,500, and again you owe $11,500. The loan is said to be secured to the extent of $7,500. The remaining $4,000 of the loan is not secured by anything. So the $7,500 secured portion would be paid through monthly payments in your Chapter 13 plan. The $4,000 unsecured portion is treated as general unsecured debt and paid prorata with the rest of those creditors.  It does not constitute extra money paid into the plan.

Under cramdown, you pay the $7,500 secured portion at an interest rate which is often lower than your contract rate. Paying a reduced amount—$7,500 instead of $11,500—at a lower interest rate results in a lower monthly payment. That payment is often reduced substantially further by extending the repayment term further out than what the contract had provided, up to a maximum of five years (from the date of filing the Chapter 13 case).

In this example, assuming an interest rate of 5% and a repayment term of five years, the payment on the $7,500 would be less than $142 per month. The total remaining payments on the loan, with interest, would be about $8,492, in contrast to paying $12,650 under the contract. That is a savings of $4,158.

Note that under cramdown, even though the repayment term stretches the payments about two and a half years longer than under the contract, the amount of interest to be paid is often less. That’s both because the interest rate is often lower, and it’s being applied to a lower principal amount (here 5% interest instead of 8%, and $7,500 instead of $11,500).

So, by tactically holding off from filing a Chapter 13 case until after the 910-day period expires, in this example you would reduce the monthly payment from $425 to $141.50, and save more than $4,000 before owning the vehicle free and clear.

Chapter 13 and Good Faith

Posted by Kevin on March 14, 2012 under Bankruptcy Blog | Be the First to Comment

Bankruptcy gives the honest debtor a fresh start.  We hear that often.  Bankruptcy courts are courts of equity.  Hear that too.  We also hear words like “good faith”, “fairness”, and “substance over form”.  These are not just empty platitudes but heart felt beliefs held by the court, trustees and a vast majority of practitioners.

The Code allows debtors to discharge most of their debts.  That means that they go away.  Chapter 13, which requires monthly payments over a period of 36 to 60 months, provides not only a discharge if all payments are made under a plan that was approved by the court, but also allows the debtor to adjust the obligations to certain secured creditors.  A secured creditor is a creditor that has collateral.  Like GMAC lends you money to buy a car and takes the car as collateral.

Now, in Chapter 13, you can adjust the interest rate on your car loan.  So, if your loan is for 14%, you may, subject to court approval, reduce it to, say, 4%.  The creditor can object to that treatment.  Then, the court decides what is fair, what is good faith.

In a recent case in South Florida, a Chapter 13 debtor went too far.  He bought a 2007 Suzuki and financed it at 19.95% interest. Less than 90 days later, he filed Chapter 13.  In his plan, the debtor proposed to pay 5.25% interest.   The debtor testified at the confirmation hearing and was cross-examined by the finance company’s lawyer.  Debtor admitted that he conferred with and retained  bankruptcy counsel just before he bought the car.  Of course, he did not tell the car dealer that he was going to file.  The court found that the debtor “pulled a fast one”, and bought the car knowing that he would knock down the interest rate in his plan.   The court stated that good faith focuses on whether the filing is fundamentally fair to the creditors.  Debtor was not fair.    The Court found that the debtor must pay the contract rate of 19.95%.  if he wanted the plan confirmed.

So play it straight.