Most consumers owe more on their car loan than their vehicle is worth. If you are also overwhelmed by other debt and you have a regular source of income, it may be time to consider filing a Chapter 13 bankruptcy. When an individual files a Chapter 13, he or she may be able to take advantage of the “cram down” process to reduce the balance on the car loan and the applicable interest rate.
When you purchase a vehicle, it starts to depreciate in value as soon as you drive it off of the dealership’s lot. Thus, it is common for car owners to be “upside down” on their auto loans. A debtor in a Chapter 13 case can lower the balance due on the vehicle loan to the amount that the car is worth. To take advantage of the cramdown procedure, a debtor must have purchased the car at least 910 days (nearly 2.5 years) prior to filing the bankruptcy petition.
The cramdown can be accomplished through your Chapter 13 repayment plan. The debtor proposes that the car lender should be paid the value of the vehicle rather than the full amount due under the loan. Consider this example: If you owe $10,000 on your auto and its value is only $7000, then your plan can provide that the lender have a secured claim for $7000 and an unsecured claim of $3000. The logic is that if the lender seized your car and sold it, the lender would only be able to recover $7000 since that is what the car’s value is. Classifying the $3000 as an unsecured debt means that you will likely only pay a small portion (if any) of this amount under the Chapter 13 plan.
The cramdown process may also allow you to reduce the applicable interest rate under your contract with the lender. The applicable interest rate can be determined by the bankruptcy court, but it is commonly the prime interest rate with a little extra added on.
If you are interested in learning more about how a bankruptcy filing will impact your debt, contact Faro Crowder, PA to schedule an appointment.