For debtors with car payments, chapter 13 bankruptcy provides a unique opportunity for them to lower their loan amount due while still retaining possession of the vehicle. Below is more information on what is popularly known as a car loan cram down and how it might or might not be the best option for you:
What is a car loan cram down?
A car loan cram down occurs in chapter 13 bankruptcy filings when the negative equity in a motor vehicle is dismissed, and an amount equal to the market value of the vehicle is refinanced by the bankruptcy trustee for the term of the bankruptcy. The interest rate charged to the debtor is often less than the original rate on the vehicle finance contract; the rate is set by law in an amount equal to the prevailing prime rate plus an additional percentage amount found reasonable by the court.
As an example, a car valued at $9,000 with a $15,000 balance on the loan can be crammed down by $6,000. That leaves the debtor with monthly payments, refinanced at the rate defined by law, in a total amount of $9,000 plus interest. Since the duration of chapter 13 bankruptcy is 3 or 5 years, the new term on the car will be either 36 or 60 months, accordingly.
How can a debtor qualify for a car loan cram down?
The key determining factor for debtors that determines whether or not a cram down is permissible is defined by the 910 day rule. This "rule", which is provided for in bankruptcy law, permits debtors to cram down personal vehicle loans as long as the vehicle was purchased prior to 910 days (2.5 years) before the bankruptcy filing date. The purpose of the 910 day rule is to protect car dealers from unscrupulous individuals seeking to cram down new car purchases under chapter 13 bankruptcy provisions.
If you don't qualify for a cram down because you purchased a car fewer than 910 days prior to filing bankruptcy, then you may still have an opportunity to partially cram down a car loan. There are certain exceptions that permit cram downs; for instance, if the vehicle is used in a business role or driven by other individuals than the owner, then some amount of the loan may be adjusted accordingly.
When should a cram down be avoided?
For many debtors, a cram down is a sensible means of reducing their overall debt load. However, there are a few circumstances where cram downs are not always in the best interest of the debtor. Below are some of the possible situations where a cram down should be carefully evaluated before an agreement is reached:
Slight difference between market value and amount owed
If you owe only slightly more than the market value of a vehicle, then cramming down is usually not advisable. Cram downs are assessed at up to a ten percent fee to be paid to the bankruptcy trustee, and this amount is added to the total cost of the new arrangement. For example, if your vehicle is worth $5,000, and the amount owed is $5,400, then a cram down would lessen your overall amount owed by $400; however, a ten percent trustee fee would raise the final amount to be refinanced to $5,500. Obviously, you would actually lose money in that scenario, and a cram down would probably be inadvisable.
Low interest rate on the original finance contract
While the finance rate on a cram down is set by law, there are some debtors who will find themselves on the losing end should they cram down their loans. For instance, if the current prime rate is 3.5 percent, the cram down interest rate for paying off the balance owed will probably be at least 4.5 percent, perhaps a bit more depending on the court's decision. However, if a debtor financed the vehicle at 2.0 percent, then they will almost certainly pay more in interest charges under the bankruptcy refinance agreement.
Cram downs are only permissible on jointly-owned vehicles if the spouse or co-owner file bankruptcy under the same proceedings. Since filing bankruptcy has a significant impact upon a person's credit and overall financial status, it is often not worth involving a spouse or partner in the process for the sake of saving money on a vehicle loan.
Seek professional assistance
Whenever you are considering filing chapter 13 bankruptcy, it is vital that you seek the assistance of a bankruptcy attorney who is qualified and licensed to help you. The issues related to cram downs can become complex, and you will need the guidance of an attorney when making decisions.