Mounting motor vehicle payments can quickly become unmanageable and sometimes result in financial ruin. Fortunately, Chapter 13 can offer you an opportunity to manage your finances and catch up with the loan payment. Also, if your car's worth is below the outstanding loan balance, you can get rid of the difference. The process is called an auto loan cramdown. Experienced attorneys at the Los Angeles Bankruptcy Attorney can answer all your questions about how cramdown and bankruptcy can work for you.
What is Cramdown?
After purchasing a motor vehicle, its value starts to go down (depreciate). It isn't uncommon to turn out with an automotive loan balance that is more than your car's worth, particularly if you:
- Rolled over your former debt balance into the current contract
- Took a high-interest loan
- Bought a motor vehicle that depreciates fast
Sometimes, filing bankruptcy can assist. It will help you reduce the debt balance down to the motor vehicle's value through a process referred to as Chapter 13 bankruptcy cramdown.
How Chapter 13 Cramdown Works
Cramdown is only available in Chapter 13 (you can't cram your vehicle's loan in a Chapter 7 case, although there is an identical process called redemption). You're permitted to cram down specific secured debts. A secured debt is one whose creditor has a security interest in the asset and can repose it should you fail to be current on the loan payments. Perfect examples of secured debts include car loans and mortgages.
In a Chapter 13 case, you come up with a repayment plan to repay your lender for three (3) to five (5) years. In the repayment plan, you could suggest that the auto creditor receive the car's value rather than the whole debt balance if you can satisfy specific conditions.
For instance, if you borrowed fifty thousand dollars to purchase a new vehicle in 2016. In 2020, the car's value has depreciated to twenty thousand dollars, but the loan balance reduced to thirty thousand dollars. That means your secured loan is twenty thousand dollars. If your creditor repossesses the car and sells it, they will receive only twenty thousand dollars. That is how a cramdown can assist you.
In the Chapter 13 repayment plan, you can offer to pay the replacement amount to the creditor. Therefore, in the example above, you could cram down your loan to $20,000.
Calculating Your Cram Down
For the car subject to the cramdown, two variables should be put into consideration:
- The current value of the motor vehicle
- Interest rate charged
Often these variables are litigated, and a payment plan can't be approved until the variables are confirmed. If you don't like the payment terms and conditions, you can surrender the car to a secured lender, removing it as a confirmation barrier.
What Takes Place to the Remaining Debt Balance?
The remaining balance of the loan will be treated the same way as your other nonpriority unsecured debts in a Chapter 13 case like medical bills and credit cards. Usually, unsecured debts receive payment after you pay:
- Your monthly payment on secured debts like mortgage
- The balance of priority debt, such as domestic support arrears and recent tax obligations
Typically, unsecured lenders divide all remaining funds on a pro-rata basis. Because, in most cases, Chapter 13 repayment plans pay little or nothing to creditors, the auto lender will possibly receive nothing on your remaining loan balance. All unpaid loan balance will be wiped out (discharged).
Are There Additional Advantages of Auto Loan Cram Down?
Discussed below are advantages of car loan cram down:
Reduced Interest Rate
Another benefit of cramming down your debts through Chapter 13 is that the interest rate will be reduced. Bankruptcy court determines your interest rate paid to secured lenders through the repayment plan. And usually, it is lower than the standard rate.
Stretch Out Payment on Your Loan
A Chapter 13 case permits a debtor to stretch out the payments over a three (3) to five (5)-year duration, regardless of whether they qualify for the loan cramdown. For instance, if they have three years left on their car loan, putting it in a five-year repayment plan allows them to spread the debt out over two more years and substantially reduce their payment.
Helps You Save
If you combine the capability to stretch the payments, auto loan balance cram down, and reduced interest rate, your savings can increase significantly.
For instance, Mary's motor vehicle is eleven thousand dollars, but her loan balance is fifteen thousand dollars at an interest rate of nine percent. Her payment is five hundred dollars, and she has three years left on her car loan. Mary files a Chapter 13 case and recommends a five-year repayment plan. If she crams down the loan to the fair market value of fifteen thousand dollars and an interest rate to 4.5 percent, her automotive payments will be two hundred and five dollars.
Therefore, a cram down will both save your motor vehicle and money. Remember, with a Chapter 13 case, you can catch up on your missed payments.
Are There Limitations to Cram Down?
The Congress has imposed specific limitations on when a borrower can use a cramdown to stop debtors from cramming down recent purchases. The limitations depend on the category of property used to secure the loan you want to cram down.
Normal Car Loan
Assume you purchased a new motor vehicle for twenty thousand dollars, and the bank financed your entire loan. According to the Bankruptcy code, you should have bought the car at least 2.5 years (910 days) before filing for bankruptcy. This restriction prevents individuals from purchasing new vehicles and then cramming down the debt immediately after riding it off the lot.
In reference to the above example, the bank has a security interest in your loan (purchase money security interest). If a debtor defaults, the bank might repossess the vehicle. If it is two (2) years since the debtor bought the vehicle, they cannot pay less than what they owe. However, assuming they get to 2.5 years since the purchase and they owe fifteen thousand dollars, but the car's current worth is eight thousand dollars, they can cram the loan down. That means they will only pay eight thousand dollars.
Auto Debt with a Trade-in
Should a borrower trade-in an old motor vehicle when they purchase a new motor vehicle, that can change how the 2.5-years restriction applies to the borrower. However, if the debtor owns the old vehicle altogether, and trades it in for the car's value, the 2.5-year rule applies.
If the debtor still owes money to the old vehicle and gets wasted into the new car debt, that changes things. Assume a debtor bought the vehicle for twenty thousand dollars. The borrower also had another car worth two thousand dollars as a trade-in, but they owed seven thousand dollars. In that case, the bank would finance this is it would agree to:
- A twenty thousand dollars cost of the new motor vehicle
- Apply the two thousand dollars trade-in, and the vehicle will be financed at eighteen thousand dollars
- Repay the seven thousand dollars on the previous car
- Add the seven thousand dollars loan to the eighteen thousand dollars debt for a twenty-five-thousand-dollar loan
In the Chapter 13 case, the loan will be partly reduced in less than 2.5 years. The loan will be bifurcated. The seven thousand dollars loan is a PMSI and can't be reduced before 910 days. Nevertheless, the seven thousand dollars will be considered as a negative entity, and it is an unsecured loan.
Your creditors will get paid using the order of hierarchy. The eighteen thousand dollars auto loan will be on top of the list and should be paid in full provided it's less than 2.5-year old. And if 910 days have passed, you will pay the current market value.
It is worth noting that you've to wait for a year after purchasing before you're eligible for bifurcating.
It is a high-interest loan that a borrower takes against their motor vehicle to cater for other expenses. Since this isn't a debt used to buy your vehicle, it isn't a PMSI. In other words, you do not have to wait for 2.5 years to reduce your loan. However, you have to wait for a year.
Cramdown restrictions are complicated, and filing for bankruptcy should be done with the assistance of a skilled bankruptcy attorney.
Are There Exemptions that Might Permit a Cram Down Before 910 Days?
Generally, the 910 rule applies to a purchase money lender who lends to a creditor for a personal use car. It is possible to cram a car before if:
- Another lender has refinanced the automotive.
- The car is used for business use.
- The motor vehicle was bought for another person other than the borrower.
In any situation, it could be enough to exceed personal use and purchase money requirements.
However, there is a likelihood your lender will object to your bankruptcy case. Should that happen, you should settle with your creditor or allow the court to determine if you can cram down your auto loan.
Common Issues Affecting Vehicle Cramdown
Discussed below are situations that might affect your ability to cramdown your motor vehicle:
- Non-filing Co-Debtors- It is not possible to cram down your car loan if you've a co-debtor who isn't in bankruptcy. Usually, this happens when a couple obtains a debt together, and one partner files a Chapter 13 case. In this scenario, the lender might oppose the auto loan cramdown or seek repossession or compensation once the bankruptcy case is over. Bearing that in mind, sometimes it is possible to get a lender's agreement to the auto cramdown if your alternative is a Chapter 7 case for all borrowers.
- Cross-Collateralized Car Loans- A cramdown could be instrumental in handling cross-collateralization provisions, especially in a credit union loan. In a car loan, cross-collateralization permits the credit union to use the car as collateral for your subsequent debt issued by the credit union.
Auto Cram Down and Credit Score
Filing for bankruptcy has a devastating effect on credit rating provided it appears on the credit report. Most debtors filing for bankruptcy cases have experienced financial challenges for long and don't have a good credit score.
Getting Credit During Bankruptcy
You require approval from a bankruptcy trustee before acquiring a loan. Additionally, the trustee will not approve without establishing particular circumstances. If you get debt for a non-emergency without court authorization, the chapter 13 case will be dismissed, and you will not get a discharge.
Getting Credit Following Cram Down
Assuming you have completed your Chapter 13 repayment plan, your debts will be discharged. You can acquire new debt, but you should ensure you keep up with payments. Typically, creditors charge more interest if you've a bankruptcy and cram down on your record.
Over time, the credit rating will improve, and the interest rate will decrease as long as the debtor can pay.
What are the Different Cram Down Alternatives Found in Chapter 7?
As previously mentioned, cram down is not available in Chapter 7, but you use the following alternatives:
Reaffirming the Car Loan
A reaffirmation agreement is an agreement with your lender where you agree to clear your debt as if you haven't brought a bankruptcy case. Occasionally, lenders will agree to better terms and conditions as an incentive before the debtor signs the agreement. Nevertheless, it is not advisable to get into a reaffirmation agreement. It can lock you into a loan and make you subject to credit report and deficiency judgment in the event you fall behind on your payments.
The most practical action is to make payments and keep your motor vehicle. Your auto lender should allow you to keep the vehicle provided you continue making the payments. It offers you an option to surrender your motor vehicle without worrying about deficiency judgment if you run into financial challenges in the future.
In a Chapter 7 case, it's possible to pay your car's fair market value secured by the auto debt in a lump sum. Your creditor may object your car's valuation, but most bankruptcy judges will put Kelley Bluebook into account or comparable assets highlighted for sale. Obtaining money to redeem assets can be overwhelming. Usually, debtors use exempt contributions and assets from their loved ones to clear the redemption amount.
For instance, Michelle has a car with a bluebook worth five thousand dollars. The car's loan balance is ten thousand dollars. Michelle brings a Chapter 7 case, and she can redeem the car by paying her creditor five thousand dollars. The remaining balance is discharged.
Advantages of Hiring a Bankruptcy Lawyer
The main advantage of hiring a qualified lawyer is that the attorney knows the challenges that come with cramming down an auto loan and will plan accordingly. Discussed below are other benefits a lawyer will bring to the table:
Consider Bankruptcy Alternatives
Filing for bankruptcy may not be the only method to realize financial freedom. If bankruptcy is not the best option, any experienced lawyer will recommend an appropriate alternative, such as negotiating with your creditor.
Value Your Motor Vehicle
Do you know the value of your motor vehicle? The attorney will ensure you reveal and value the car realistically.
Help You Understand What to Expect
Filing bankruptcy is complicated, and most people don't know what to expect as the cases proceed. As a result, many suffer from misconceptions about the aspects below:
- Debt that qualifies discharge
- Tax implication
- Effects of cramdowns on personal employability and credit score
Your bankruptcy lawyer should be in a position to help you form accurate expectations about both the short and long-term impact of auto loan cramdown.
Moreover, the attorney will explain and prepare you for things such as:
- What actions the creditor can take
- Steps you should take to be eligible for the cram down
- The role of the judge and bankruptcy trustee
Complete the Schedules Plus Other Necessary Paperwork
You should file financial details about income, expenses, debts, assets, and financial transactions. The attorney knows what you should reveal, how to value the property, what is considered as income, necessary and reasonable expenses, tax returns to submit, among other issues.
Help You Give a Complete and Accurate Testimony
A debtor should sign the bankruptcy paperwork under penalty of perjury, declaring that the details are true as far as they are concerned. During their meeting with creditors and in court, they will affirm that you are telling the truth. The lawyer will be with them to make sure the testimony is complete and correct.
It is essential to tell your lawyer all your auto loan details. Whether you bought the motor vehicle, refinanced it, or had the car paid off, then got a title loan and used it as collateral, it could make the difference in determining whether the cram down will be an essential tool.
Find Legal Representation Near Me
Filing for a Chapter 13 case is a serious decision that is subject to scrutiny, especially if you want to cram down your car loan. Both the court and your creditor will analyze your financial situations carefully, and your investments will draw a closer inspection. At the Los Angeles Bankruptcy Attorney, we can assist you in making informed decisions about your motor vehicle and finances. To learn more about cram down as a debt relief option during a consultation, call us at 424-285-5525.