Chapter 13 and Car Loans

If you have a car loan, your Chapter 13 may help you reduce the overall cost of your loan. Debtors may take advantage of a bankruptcy process known as a cram down. A cram down can be used when the amount of your car loan exceeds the current value of your automobile. Cram down is one of the major benefits filing a chapter 13 bankruptcy case. In most cases the cram down option saves thousands of dollars over the life of the chapter 13 plan. But not every car is eligible for a cram down.

Cram down requirements

Every car loses value the moment it leaves the dealer lot. This often means that a new car buyer already is subject to an upside own loan the moment they move their vehicle. Cram downs are not suitable for everyone, you must have purchased your vehicle for a minimum of two and a half years before filing for Chapter 13. If your car was purchased within the 2.5 years before filing you will have to pay the full loan balance. Your bankruptcy attorney will discuss with you if waiting with filing of the chapter 13 is an alternative in order to take advantage of the cram down provision. Even if waiting to file is not feasible, paying the car loan through the chapter 13 will have advantages as you are only paying the court’s interest rate and not the contract interest rate. The court’s interest rate is most often lower than the contract interest rate. In addition, you can stretch out your car loan to up to 60 months.

Understanding the process

When you file a Chapter 13 bankruptcy, your debt repayment is typically done over a period of three to five years. Additionally, negotiations often occur between your attorney and creditors to reduce the amount that must be repaid. When you cram down, you pay the value of the vehicle as of the date of filing. The value in St. Louis is determined by the NADA blue book value. The value to list on your petition should 97% of the National Automobile Dealers Association (NADA) retail value. Specific conditions of the car can lower the NADA value. If your car creditor files a proof of claim that includes interest or does not list the correct value of the car which often happens, your St. Louis bankruptcy attorney will need to object to the claim and state the true value of the car in the amount the claim should be allowed for.

What happens to the difference

When you avail yourself of the cram down process, your loan balance is reduced to the amount that the car is worth. The remaining balance of the loan is then added to unsecured debt you owe. Unsecured debt is often not paid and wiped out at the end of the chapter 13 bankruptcy case. Whether you have to pay to unsecured creditors depends on if you have disposable income as determined by your B22C form or if you have non-exempt equity which would be listed in Schedule C.

Not available in Chapter 7

Many debtors believe that a cram down is available for any type of bankruptcy filing. Your St. Louis bankruptcy attorney will help you determine which filing is most beneficial for your individual needs. However, a cram down is only available if you are filing Chapter 13. If you filing a chapter 7 bankruptcy, you might be able to redeem your vehicle, that means a new car lender pays your previous car creditor the value of the car. The new loan amount will be only the value of your vehicle. Redemptions is the equivalent to cram down in a chapter 13. But here too, specific requirements must be met in order to redeem your vehicle.

Secured debt versus unsecured debt

Cram downs are not available for a home mortgage, but may be available on other assets that have loans outstanding. For most consumers, this would only apply to their automobile, but it may also apply to motorcycles and motor homes. Your attorney can advise you if this process is suitable for your circumstances. In effect, a portion of your secured debt would be considered unsecured since the item is worth less than the amount of the loan that is outstanding. All other personal property must have been purchased at least one year before filing in order to be able to cram down.

If you have an outstanding car loan, and your vehicle has been owned for the necessary period of time, a cram down may help you reduce your debt even further. When you meet with your bankruptcy attorney, make sure that you have copies of your most recent statement on all outstanding loans. You may be required to obtain a current market valuation to take advantage of a cram down.

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