Cramming Down a Car in Bankruptcy

“Cramdown” is an informal term for one of the most used benefits of Chapter 13 bankruptcy. You won’t find the term in the federal Bankruptcy Code, yet lawyers and judges use it all the time. A “cramdown” of an auto loan is a major benefit available in Chapter 13 that is not available in Chapter 7 bankruptcy.

It refers to a procedure provided under Chapter 13 law for legally rewriting a vehicle loan. It results, usually, in reducing both the monthly payment and the total you pay for the vehicle. The more your vehicle is “underwater”—worth less than what you owe on it—the more you benefit from cramdown.

If your vehicle is worth less than you owe, or you are paying excessive interest, cramming down a car loan in Chapter 13 bankruptcy can reduce your balance, cut your interest rate, and slash your payment.

Bad car loans can be devastating financially. As a bankruptcy attorney here is Atlanta, Georgia I have seen clients with auto loans more than two times the value of their vehicles and at exorbitant interest rates. In addition, many credit union’s will cross-collateralize car loans with consumer loans like credit cards which leaves many consumers with liens far above the value of their vehicles. Cramming Down the Balance on an Auto LoanCramming down your car loan balance in Chapter 13 reduces the balance to the vehicle’s fair market value. You pay the new lower amount in 36 to 60 months through your Chapter 13 plan. Although a creditor may object to the value that you propose, courts will generally accept the average Bluebook or NADA value. Any remaining balance becomes an unsecured debt like your credit cards, medical bills, etc. Because many Chapter 13 debtors pay only a small portion of their unsecured debt (often cents on the dollar), cramming down the balance can save you thousands of dollars.Cramming Down the Interest Rate on an Auto LoanThe bankruptcy code also allows debtors to cram down the interest rate on a vehicle loan. Here in the Northern District of Georgia, a rate of one or two points over prime is standard. The current prime rate(as of the date of this post) is 4.75%. Therefore, the court will allow a cram down of the interest rate in the range of 5.75% to 6.75%. If you are paying a high-interest rate, even a drop of a few points can make a significant difference.The 910-Day Rule

To be eligible to cram down the balance on an auto loan, you must have purchased the vehicle at least 910 days (a little over 30 months or 2.5 years) from the date that you filed your Chapter 13 bankruptcy. The 910-day rule also applies to cramming down interest rates.

Stretching Out Payments on an Auto Loan

Another advantage of Chapter 13 bankruptcy is that you can stretch out your payments over the course of your 36 to 60-month plan, regardless of whether you are eligible for a cramdown. For example, if you have 36 months left on your auto loan, by placing it in a 60-month Chapter 13 plan, you can spread your loan out over 24 more months and significantly reduce the payment.

Making the Cramdown Permanent. You must complete your Chapter 13 plan to make the cramdown of the balance an interest rate permanent. If you do not complete your Chapter 13 plan, the original balance and interest rate may be restored and back interest added to the balance.

If you have any questions about Chapter 7 bankruptcy or Chapter 13 bankruptcy please feel free to go to https://saedilawgroup.com or contact us at info@saedilawgroup.com

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