Car Loan Modifications in Chapter 13 Bankruptcy

Car Loan Cramdown Basics

It is commonly believed that new cars lose 10% of their value the moment you drive them off the lot. True or not, bad car loans often plague people considering bankruptcy. The car owner might have a loan balance that greatly exceeds the value of the car. In Chapter 13 bankruptcy, it is often possible to pay the lender what the car is worth rather than the full balance of the loan. Reducing the loan balance in this way is referred to as a “cramdown”. Cramdowns are only available in Chapter 13 bankruptcy. Chapter 13 payment plans generally last from 3 to 6 years based on your gross income.  In a Chapter 13 bankruptcy, you propose a repayment plan to pay back your creditors over a three to five year period. (To learn how Chapter 13 bankruptcy and the repayment plan work, see the articles in our Chapter 13 Bankruptcy topic area.) You can propose to pay the car lender only the value of your vehicle if you meet certain conditions. The rest of the car loan would be treated like a credit card, meaning that you would only a portion of it.

Suppose you bought a car in 2013 and borrowed $25,000 to help pay for it. Fast forward to 2016 and you’ve only paid the loan down to $20,000 and the car has slipped in value to $12,000. A cramdown might help you pay the lender $12,000 instead of the $20,000 that you owe.

Your Chapter 13 plan would propose to pay the lender current replacement value or “retail” value of the car. If approved by the court, you would only have to pay a portion of the car loan in full.

What Happens to the Remaining Balance?

Chapter 13 plans often involve paying a small percentage to the unsecured creditors such as credit cards and medical bills. The remaining balance on the car loan would be treated in the same way as other unsecured debt with the car lender receiving pennies on the dollar. Many of my Chapter 13 clients pay little or nothing to their unsecured creditors. Once you have completed the plan payments and received the discharge, you will own the car free and clear.

Possible Interest Rate Deduction

People considering bankruptcy often have problematic credit scores. Bankruptcy law allows you to lower the interest rate on your, usually to the prime interest rate plus 1% or a little more. I have seen interest rates lowered from 18% to as low as 4.25%.

Cramdowns Are for Older Car Loans

Bankruptcy cramdowns are meant for older car loans. In order to qualify for a cramdown, you must have purchased the car at least 2 ½ years (910 days) before you filed for bankruptcy. This prevents people from buying a new car just before bankruptcy and then quickly filing for bankruptcy to get a cramdown.

If you live in the San Diego area and are having debt problems, call us at (619) 448-2129 or click here to get information on our free consultations.

Image credit: Charlie

Carl Starrett

Carl Starrett is a consumer bankruptcy attorney in San Diego, California helping debtors file for protection under Chapter 13 and Chapter 7 of the Bankruptcy Code.

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