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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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What Can I Do If I’m Behind on My Vehicle Loan?

Bankruptcy saves your vehicle from immediate repossession. Whether you choose to file under Chapter 7 or 13 depends in part on how strong of a medicine you need for dealing with the back payments.

My last blog focused on ways in which Chapter 7 and Chapter 13 bankruptcy each make it possible for you to keep your vehicle by keeping your vehicle lender satisfied.  But to be very practical, today let’s hone in on one very common scenario: you’ve fallen behind on your vehicle loan, but need to keep that vehicle. What are your options?

Saved by the Automatic Stay

As you probably already feel in your gut, you’ve got to accept right away that you are in a very precarious situation. Vehicle loans are very dangerous because of how quickly the collateral—your car or truck—can be repossessed. With a mortgage foreclosure you usually have a number of major warnings, stretching over months, sometimes over a year or more. Instead, with just about all vehicle loans, you get no warning. Once you’re in default—missed a monthly payment or let your insurance lapse—your vehicle could get repossessed at any time. Realistically, most repossessions do not happen until you’re about 2 months late. But that depends on your payment history, the overall aggressiveness of the creditor, and, frankly, how the repo manager happens to be feeling that day. If you’re not current, you’re in danger.  

Once a repossession happens, that does not always mean that your vehicle is gone for good. But in many situations that IS the practical result. To get a vehicle back after a repo usually takes serious money. Money you don’t likely have hanging around if you’re behind on your car payments.

And once the repo happens, thing’s often just get worse—your vehicle is sold at an auction, and you often end up owing thousands of dollars for the “deficiency balance,” the difference between what the vehicle was auctioned off for and the amount you owed on the loan (plus repo and sale costs). Next thing you know, you’re being sued for those thousands of dollars.

All that is preventable, IF you file either a Chapter 7 or Chapter 13 bankruptcy BEFORE the repossession. The “automatic stay”— a legal injunction against repossession—goes into effect instantaneously upon the filing of bankruptcy. Even if the repo man is already looking for your vehicle to repo, once you file that gets you off his list. At least for the moment.

Dealing with Missed Payments under Chapter 7

As stated in the last blog, most vehicle lenders play a “take it or leave it” game if you file a Chapter 7 case. If you want to keep the vehicle, you must bring the loan current quickly—usually within about two months after filing.  Unless your lender is one of the relatively few  that are more flexible, you need to figure out if not paying your other creditors is going to free up enough cash to catch up on your missed payments within that short time. If not, the lender will have the right to repossess your vehicle if you are not current the minute the Chapter 7 case is completed, usually about 3 months after it is filed. In fact, you may have even less time if the lender asks the bankruptcy court for permission to repossess earlier.  

Dealing with Missed Payments under Chapter 13

You have much more flexibility about missed payments under Chapter 13. In fact, you do not need to catch up on them at all.

There are two scenarios, alluded to in the last blog.

If your vehicle is worth at least as much as your loan balance OR if you entered into your vehicle loan two and a half years or less before filing the case, than you will have to pay the entire loan off within the 3-to-5-year Chapter 13 plan period. Depending on the amount of the loan balance, that may or may not mean a reduction in monthly payments. Sometimes it could even mean an increase in payments.

If your vehicle is worth less than your loan balance AND you entered into your vehicle loan more than two and a half years before filing the case, then you can reduce the total amount to be paid down to the value of the vehicle. With this so-called “cramdown,” you still must pay that reduced amount within the life of the Chapter 13 plan. And you may need to pay a portion of the remaining balance, primarily based on whether you have extra money in your budget to do so. But the savings in terms of both the monthly payments and the total amount to be paid are often huge.

Conclusion

Bankruptcy stops your vehicle from being repossessed, and gives you options for dealing with previously missed payments. Chapter 7 may work if you can pay off the entire arrearage fast enough. Otherwise you may need the extra help Chapter 13 provides. Or you might want to file Chapter 13 to take advantage of the “cramdown” option if that applies to you, after also weighing all the other considerations between Chapter 7 and 13.  

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Why Chapter 13 is So Nifty

Chapter 7 is short and sweet and to the point. It often gets what you need—a discharge (a legal write-off) of all or almost all of your debts. But in SO many situations, Chapter 13 gives you so much more.

 In my last blog I showed a simple Chapter 13 case works. In my example, two debts that cannot be discharged in a Chapter 7 case—a recent IRS income tax debt and some back child support—were conveniently paid over time by the debtor through a Chapter 13 case, while that debtor was protected from those two particularly aggressive creditors. Chapter 13 buys time and protection that Chapter 7 simply isn’t designed to provide.

Here are just a few of the other extras that come with Chapter 13.

1. You can keep your possessions that are not “exempt,” instead of allowing a Chapter 7 trustee to take them from you. Retain much more control over the process compared to trying to negotiate payment terms with a Chapter 7 trustee. With Chapter 13 you have 3 to 5 years to pay for the right to keep any such possessions, instead of only the few months that the Chapter 7 trustees generally allow.

2. If you are behind on your first mortgage, you have 3 to 5 years to catch up on this arrearage, instead of the few months that a mortgage holder generally allows.

3. You can get a second or third mortgage off your home’s title, and avoid paying all or most of such mortgages, if the value of your home has slid to less than the amount of the first mortgage. You can’t do this in a Chapter 7 case.

4. If you bought and financed your vehicle more than two and a half years ago, then your vehicle payments, interest rate, and even the total amount to be paid on the loan can often be reduced through Chapter 13. This can enable you to keep a vehicle you could otherwise no longer afford. In Chapter 7 by contrast, you are usually stuck with the contractual payment terms.

5. In the same situation—a 2 and a half-year or older vehicle loan—if you are behind on the vehicle loan payments, in a Chapter 13 you don’t have to catch up those back payments. But in a Chapter 7 you almost always must do so.

6. If you owe an ex-spouse non-support obligations, you can discharge those in a Chapter 13 but not in a Chapter 7. These usually include obligations in a divorce decree to pay off a joint marital debt or to pay the ex-spouse for property-equalizing debt.

7. If you have student loans, with Chapter 13 you may be able to delay paying them for three years or more, which can be especially valuable if you have some other debts that are critically important to pay (such as back child/spousal support or taxes). And if you have a worsening medical condition, this delay may buy time until you qualify for a “hardship discharge” of your student loans.

Straight Chapter 7 bankruptcy if often exactly what you need to get a fresh financial start. But one reason you need to talk with an experienced bankruptcy attorney is that sometimes Chapter 13 can give you a huge unexpected advantage, or a series of lesser ones, which can swing your decision in that direction. (There are others beyond the main one listed here.) My job is to give you honest, unbiased, and understandable advice about these two options—or any other applicable ones—so that you can make the very best choice. Give me a call.

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Don’t Give Up Your Vehicle Before Knowing Your Options

Why? Because you may be able to keep a vehicle you thought you couldn’t afford to pay for. Chapter 13 allows you to pay smaller monthly vehicle loan payments, under certain conditions. You may be able to pay off the debt and own the vehicle free and clear for a lot less than the loan balance.

This blog is one of a series on the mistakes people make before seeing an attorney about filing bankruptcy. These decisions often seem sensible from a certain angle. But almost always they are made without knowing all the options.

If you need a vehicle but just can’t afford the monthly payments, you probably figure that you are going to lose the vehicle and don’t have any choice about it. You know the contract requires you to make the payments or you lose the vehicle. You may have been trying hard for months to keep or get the payments current, putting up with late fees and constant notices or phone calls from the creditor threatening repossession. You would have already let the vehicle go except you’ve got to have a vehicle for work and/or other family obligations, and have no way to replace it. You feel stuck, with no good options.

On top of everything else, you might have heard that a bankruptcy can’t help much, at least for hanging onto the vehicle—that you still have to either make the payments, and catch up if you’re behind, or else lose the vehicle.

That’s true, in a “straight bankruptcy,” a Chapter 7.

But it’s not necessarily true in a Chapter 13 case. If you meet two conditions, you can likely do a “cramdown” on the vehicle loan: lower your payments and likely pay less overall for the vehicle. You may well also be able to lower your interest rate.

The two conditions to be able to do a “cramdown”:

1) Your vehicle loan was entered into more than 910 days before your Chapter 13 case is filed (that’s just about two and a half years before); and

2) At the time your case is filed, the value of your vehicle is less than the balance on your loan.

If your vehicle loan meets these two conditions, we can essentially re-write your loan.  We can reduce the total amount you must pay down to the value of the vehicle, “cramming it down” to that lower amount. That’s called the “secured portion” of the debt. We then calculate a new monthly payment—the amount needed to pay off that smaller balance, often at a lower interest rate, and often on a longer remaining term, resulting often in a radically reduced monthly payment.

What happens to the “unsecured portion”—the part of the debt beyond the value of the vehicle? It gets lumped in with the rest of your unsecured debts, usually not requiring you to pay anything more to all your unsecured creditors regardless of your vehicle loan.

And what if you’re behind on your vehicle loan at the time you file your Chapter 13 case—when do you have to pay that arrearage? You don’t. It’s just part of the re-written, new “crammed down” obligation.

So you can see that you might NOT want to surrender a vehicle or allow it to be repossessed if instead you could keep that vehicle while immediately having it cost you much less to do so. Often, having a reliable vehicle is essential to achieving a successful re-start of your financial life.  Before you lose that essential part of your financial plan, come see me to find out your options.

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“If Only I’d Gone to See My Bankruptcy Attorney Sooner . . . “

Those are the words I hate to hear from a new client.

Bankruptcy attorneys are in the business because we truly want to help people. It’s an emotionally tough area of law, dealing all the time with clients who are financially hurting. Usually my client are also hurting in other ways, related to what caused or contributed to their financial problems—an illness or injury, the end of a marriage or of a business, the loss of a job or, these days for many people, the loss of an entire career. What makes my day—which it does virtually every day—is to give great news to a client, that they will now get relief from their debts, or that there is a feasible plan to save their home, or to deal with their child support arrearage or their income tax debt. Every day we see people transformed in front of our eyes as impossible burdens are lifted from their fatigued shoulders.

But of course the information I share with clients is not always good news, and the advice I give is not always what my clients want to hear. Tough choices have to be made, and some goals turn out to be unrealistic. That’s all part of life.

But the most frustrating situations for both me and my clients are when we find out that they have self-inflicted some of their own wounds. The easily-preventable-but-now-it’s-too-late bad decisions they’ve made, often just a few months or weeks earlier, without getting legal advice beforehand. The goal of my next few blogs is to help you avoid those.

Here’s a taste of some of what we will be covering.

1) Preferences:  If you pay a creditor any significant amount before filing a bankrutpcy—especially a relative you hope not to involve in that bankruptcy—the bankruptcy trustee may well be able to force that relative—through a lawsuit if necessary—to  pay to the trustee whatever amount you paid to that relative.

2) Surrendering a “cramdownable” vehicle:  If you really needed a vehicle but you owed on it more than it was worth and figured you couldn’t afford the payments anyway, so you either voluntarily surrendered it, or did not file a bankruptcy until after it was repossessed, you may well have been able to keep that vehicle in a Chapter 13 case with much lower payments and total amount paid

3) Squandering exempt assets:  Just about every day it seems clients tell me how they’ve borrowed against or cashed in retirement funds in a desperate effort to pay their debts, using precious assets that would have been completely protected in the bankruptcy case they later file, used to pay debts that would have simply been “discharged” (legally written off) in that bankruptcy.

4) Rushing to sell a home:  Bankruptcy provides some extraordinary tools for dealing with debts that have attached as liens against your home, such as judgments and 2nd mortgages. If you hurriedly sell your home to avoid involving it in your bankruptcy case, or some other reason, you could lose out on opportunities to save tens of thousands of dollars.

5) Allowing a judgment against you: If you are sued by a creditor, you may assume that the debt or claim from that lawsuit would be discharged in your anticipated bankruptcy case.  But in some cases, the judgment from that lawsuit can effectively result in exactly the opposite, a determination which results in the debt NOT being able to be written off in your bankruptcy case.  

As you look at this list, notice that the legally and financially wrong choice is often what seems to be 1) the morally right one, and 2) common-sense one. Doing what seems right and sensible can really backfire. In the next few blogs I explain these so they make sense to you, along with other avoidable mistakes.  But by now it should be clear—nothing takes the place of actual legal advice about your own unique situation from an experienced attorney. So, make your day and mine by coming in to see me. Avoid ever having to say “if only I had gone in sooner.”

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