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Upside Down on Car Loan – Chapter 13 Cram Down Provisions and Chapter 7 Redemption
Customers often find themselves in need of debt due to charging a car loan poorly.
Modern society requires owning and maintaining a car, which sometimes turns into a huge financial burden. Lenders are quick to finance vehicles, knowing that borrowers highly prioritize car transportation over most other financial obligations. Even borrowers with bad credit are put into car finance packages with high interest rates to compensate aggressive lenders for the added risk.
Financial hardship often arises from auto financing. The happy car buyer drives their new vehicle off the lot financed almost 100%. As the saying goes, almost immediately afterward, the new vehicle depreciates by several thousand dollars before it even hits the highway.
Car hauling costs $4,000.00 to $6,000.00 annually including car loan payments, liability and collision insurance, repairs and maintenance and gasoline.
Chaos begins when an unexpected auto repair not covered by warranty, or a motor vehicle accident, unexpectedly and substantially decreases the value of the vehicle well below the outstanding loan balance owed to the bank. Or, perhaps more harmlessly, a trade-in for a new vehicle, where eager car dealers and lenders agree to take your old vehicle in trade, and throw the remaining balance of your old car loan (for a slightly higher payment) onto the back end of your new one. car loan leaving the new car buyer considerably “down” on the new vehicle purchase.
These situations leave the borrower in a difficult situation where considerable parts of income are dedicated to covering an unsecured automatic debt obligation that is of no use to sustain modest costs of necessities for family life.
Under certain circumstances relief from these devastating financial hardships can be obtained through a bankruptcy filing.
CHAPTER 13 CRAM DOWN PROVISIONS
Under Chapter 13 of the US Bankruptcy Code, debtors are allowed to “Crum Down” the unsecured portion of their auto loans to the fair market value of the vehicle securing the loan. This forces debtors to repay only the secured portion of the car loan, but the unsecured balance is treated as general unsecured creditors providing a great advantage for the Debtor, allowing the Debtor to only pay a small fraction of the unsecured portion of the car loan debt. that is due.
As an example, let’s assume that our debtor owns a car worth $10,000.00 and there is a car loan with an allowance of $20,000.00. In this scenario, the loan is only partially secured. The auto lender is only insured for the value of the vehicle or $10,000.00. The remaining $10,000.00 balance on the loan is unsecured. In this situation the Bankruptcy Code gives the Debtor the right to cut off the unsecured portion of the car loan and treat that portion of the loan as unsecured. So, if General Unsecured Creditors only received a 20% dividend, the auto lender would only receive $2,000.00 on their unsecured portion of the auto loan.
These situations become sticky between Debtor and Lender as disagreements often arise as to the correct value of the vehicle. Your bankruptcy attorney will need to negotiate a settlement of the valuation prior to confirmation of the Debtor’s Chapter 13 plan.
Assessment is guided under provisions of the US Bankruptcy code, specifically 11 US Code § 506 – Determination of Secured Status.
11 USC §506(a)(2) specifically states:
“If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property on the date of the presentation of the petition without deduction for costs of sale. or marketing. With respect to property acquired for personal, family, or household purposes, replacement value means the price that a retail dealer would charge for property of that kind considering the age and condition of the property at the time value is determined” emphasis added
The Cram Down provision under the bankruptcy code also provides for a reduction in the interest rate on the car loan. Often borrowers find themselves shelling out huge auto payments used to cover exorbitant interest rates auto lenders often charge risky borrowers.
An interesting exception was enacted under the 2005 Amendments to the US Bankruptcy Code prohibiting clamp-downs where the purchase money auto loan was originated within 910 days (2 ½ years) of the filing date of the Chapter 13 bankruptcy. [see 11 U.S.C §1325(a)(9)]. Debtors should consider timing a Chapter 13 filing if they wish to avoid the burden of burdensome auto loan debt. Bankruptcy rules require that car loans taken out within 2 ½ years of the bankruptcy must be paid as agreed.
CHAPTER 7 EXPRESSION
Cram-downs are not allowed under Chapter 7 bankruptcy (or “straightforward bankruptcy”). But, Chapter 7 debtors are allowed to “buy out” personal property under 11 USC §722.
11 USC §722 provides as follows:
“An individual debtor may . . . redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempt under section 522 of this title or has been abandoned under section 554. of this title , paying to the holder of such lien the amount of such holder’s permitted secured claim that is secured by such lien in full at the time of redemption.” emphasis added
Redemption, however, can be difficult under Chapter 7 because debtors must pay upfront in full an amount sufficient to pay off the secured portion of the car loan measured by the fair market value of the vehicle at the time the debtor seeks to redeem. the vehicle Chapter 7 does not allow restructuring of the loan, but sometimes the auto lender will accept payments over time, but usually within a short term.
If your vehicle is worth less than you owe on it, bankruptcy options can be beneficial to allow you to keep your vehicle and move toward better financial health.
Chapter 13 can reduce or “lower” your loan balance and interest rates thus lowering your auto payment making it affordable. Chapter 13 also allows you to restructure past due automatic payments and spread them out over the life of the Chapter 13 plan so that you can pay the past due payments within your personal financial resources.
Chapter 7 bankruptcy does not accommodate restructuring of loan repayments but the §722 redemption provisions allow debtors to purchase their vehicles out of bankruptcy for the fair market value of the vehicle, leaving the unsecured portion of the debt discharged under the Chapter 7 bankruptcy.
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