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Your Vehicle Loan Options in a Chapter 13 “Adjustment of Debts” Case

Chapter 13 helps much more than a Chapter 7 case IF you’re behind on payments or sometimes if you owe more than your vehicle is worth.

 

Chapter 7 Reminder:

Let’s start by summarizing your options for your vehicle loan under Chapter 7 as laid out in my last blog:

1. Retain the vehicle: Just maintain the regular payments if you’re current. Or if you are behind, pay all new monthly payments right when they are due, AND catch up on ALL back payments so that you are current on the account within a month or two of filing the bankruptcy case. Either way, you will very likely be required to sign a “reaffirmation agreement” requiring you to still pay the vehicle loan under its original terms, including eventually paying the entire balance. You get to keep the vehicle but with all of its debt.

2. Surrender the vehicle: You get the benefit of discharging (forever writing off) any “deficiency balance”–the often large amount that you would normally still owe after the creditor sells off your vehicle for less than the loan balance. The vehicle’s gone but so is all your debt. You let go of the vehicle but lose its debt.

Limitations of Chapter 7

But what if you need and want to keep your vehicle, but are behind and just have no way of pulling together the money to bring the account current within a month or two after filing the Chapter 7 case?  Or what if you really can’t afford the monthly payments but, again, need the vehicle? Or if you owe on it a lot more than it is worth, and so you are reluctant to “reaffirm” and be stuck with paying off that balance?

Some vehicle creditors may be somewhat more flexible—though rarely—by giving you more time to catch up on late payments, or by wrapping those payments into the loan balance. Even more rarely, a vehicle creditor may reduce the balance somewhat to avoid you surrendering the vehicle so that the creditor would get even less.

But these situations are indeed quite rare, and may not even help you enough. Chapter 13, however, can give you much stronger medicine.

“Cram Down” is a Huge Advantage If You Qualify

Chapter 13 gives you the ability, essentially, to unilaterally rewrite your vehicle loan, often with much, much better payment terms. The process has the informal name, “cram down,” because the secured balance of the loan is “crammed down” to the market value of the vehicle.

To qualify to do a “cram down” in a Chapter 13 case you must have started the vehicle loan more than 910 days (about two and a half years) before filing your case. Sounds arbitrary, but if your loan is at least that old (and, as usual, you owe more than the vehicle is worth), then you can do a “cram down”; if the loan is newer than that, you can’t.

Under “cram down” the secured balance on the loan—the amount you have to pay for sure—is reduced to the vehicle’s fair market value. Sometimes the interest rate can also be reduced, and often the loan’s length can be extended. The combined effect of these changes is usually to reduce the monthly payment amount, often greatly. On top of all this, you don’t have to pay any back payments because they are wrapped into the rewritten loan.  

The part of the loan balance beyond the vehicle’s fair market value—the unsecured portion—is paid the same percentage as the rest of your “general unsecured” debts (credit cards, medical bills, etc.). If you are like most people, adding that unsecured portion of the loan to their pool of “general unsecured” debts does not add anything to what they have to pay during your Chapter 13 case. That’s because those creditors usually just get paid as a pool whatever your budget says you can afford to pay during the term of your court-approved payment plan. So adding the unsecured portion of your vehicle loan to that pool of debts tends simply to reduce what each creditor gets out of the same set amount of money you pay to that pool of debts.

With “cram down” usually you pay significantly less than you would have otherwise, and then receive your vehicle free and clear at the end of the Chapter 13 case.

Chapter 13 Advantage Even without Qualifying for “Cram Down”

If your vehicle loan is not yet 910 days old so that you don’t qualify for “cram down,” or if your vehicle is worth more than the loan balance so that “cram down” would just not do you any good, Chapter 13 can still be helpful if you were behind on your loan payments. Why? Because instead of having to bring the account current in a month or two as you would under Chapter 7, you would have many months to do so.

Surrender the Vehicle

Although Chapter 13 often solves many of the problems that Chapter 7 would leave you with for keeping your vehicle, if you just don’t need it, or still can’t afford even the reduced payments, you can surrender it.

The difference from Chapter 7 is as follows. Remember from the beginning of this blog post that when you surrender a vehicle under Chapter 7 the “deficiency balance” is legally written off, without the creditor almost always receiving nothing. Under Chapter 13, in contrast, that “deficiency balance” is added to the rest of the pool of your “general unsecured” debts. But also remember from the discussion above (about the unsecured portion of a vehicle loan in a “cram down”), that in most cases that would not cost you anything more than if you didn’t surrender your vehicle. That’s for the same reason discussed above: because you usually pay the pool of your “general unsecured” debts the same total amount no matter how much debt is in that pool. The other creditors would just get less to make up for whatever money the vehicle loan creditor would get.

 

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

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


This is the final one of a series of four blog posts on the advantages of filing bankruptcy at the legally opportune time. The last three blogs covered the effect of timing on whether you file a Chapter 7 or Chapter 13 case, on which debts can be discharged, and on what assets you can keep. Today’s applies only to Chapter 13 “adjustment of debts” cases, because vehicle loan cramdowns cannot be done under Chapter 7 “straight bankruptcy.”

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 900 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 repaid, 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 like the rest of your unsecured debts, which are usually paid if and only to the extent that you have extra money available to pay them.

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. 

 

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Can I Do a “Cramdown” on Collateral Other than My Home or Vehicle?

If you buying something on time and want to keep it, you often can do so for less money IF you bought it more than a year ago.

 

Background:

  • A creditor which has rights to collateral is called a “secured creditor.” Your obligation to pay what you owe to this creditor is secured by rights it has to take possession and ownership of the collateral if you don’t make your payments on the debt. 
  • In bankruptcy, secured creditors have a lot more leverage against you because of the collateral than do creditors without any collateral—“unsecured creditors.”
  • If you want to keep the collateral, Chapter 7 is sometimes is your best choice, but in many circumstances Chapter 13 can give you more options.
  • Secured debts in which the collateral is your home or your vehicle are governed by special rules because of how important those kinds of collateral are to most people. See my blogs of last week and earlier about some of these special rules.
  • But you will not find many blogs talking about secured debts where the collateral is something other than your home or vehicle. The main secured debts of this type are probably furniture and appliance purchases, money loans secured by your own personal assets, and business loans secured by business and/or personal assets.

Cramdown:

  • This tool applies only to Chapter 13—it can’t be done in Chapter 7.
  • If the collateral securing a secured debt is worth less than the balance on that debt, then you may be able to divide that debt into two parts: the secured part—the amount of the debt up to the value of the collateral, and the unsecured part—the rest of the debt beyond the value of the collateral. An example will make that clear. Let’s say you owed $1,000 on a refrigerator, in which the purchase contract gave the creditor the right to repossess that refrigerator if you didn’t make the agreed payments. If the present value of that refrigerator is $600, then the secured portion of that debt would be $600, and the remaining $400 of that debt would the unsecured portion.
  • In a Chapter 13 “cramdown” you pay not the total debt, but only the secured part of the debt. You pay the unsecured part of the debt only at the percentage that all the rest of your regular unsecured creditors are paid. That is usually less than 100% and can sometimes be a low as 0%. In the above example, the $1,000 total refrigerator debt is crammed down to $600, and the remaining $400 part of the debt is lumped in with the rest of your unsecured creditors. So if in your Chapter 13 plan your unsecured creditors are receiving 0%, then you would pay only the $600 secured portion, the remaining unsecured portion would get nothing and would be discharged (written off) at the end of your Chapter 13 case. Or if your unsecured creditors are receiving 50%, then you would pay $200 of that unsecured portion of $400, and the rest would be discharged at the end of your case. Note that you would still pay interest, but only on the secured portion instead of on the entire balance.  

THE cramdown rule with collateral other than your home or vehicle:

  • “[I]f the debt was incurred during the 1-year period preceding [the bankruptcy] filing” then you cannot do a cramdown on collateral that is neither your home nor your vehicle. See the last sentence of Section 1325(a) of the Bankruptcy Code (tucked in right after subsection (a)(9)). This means that if the debt is any older than 1 year, you CAN do a cramdown.

So, if you have a debt, more than 1 year old, secured by something other than your home or vehicle(s), in which the collateral is worth less than the debt, you can cram down the debt to the value of the collateral. If so, then because this can only be done under Chapter 13, that would be one factor in favor of filing under Chapter 13 instead of Chapter 7. Talk to your attorney to see if this applies to you, and to find out all the other Chapter 7 vs. Chapter 13 factors to weigh in your situation.

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