Lowering Your Vehicle Loan Payments through Chapter 13 Bankruptcy
“Cramdown” of your vehicle loan can solve the problems of a reaffirmation agreement by lowering payments and protecting you much better.
Our last blog post a couple days ago was about keeping your vehicle by “reaffirming” the vehicle loan under a Chapter 7 “straight bankruptcy.” We ended by stating that reaffirming a vehicle loan can lead to problems. This is especially true if you owe more on the vehicle than it’s worth. We said that a Chapter 13 case “would likely give you more flexibility… . You may even be able to do a “cramdown,” reducing your monthly payment and potentially saving you thousands of dollars on the balance.”
That’s the topic of today’s blog post.
The Problems with Chapter 7 “Reaffirmation”
If you are current on your vehicle loan, and could comfortably afford to make the payments after you got rid of all or most of your other debts, reaffirming your vehicle loan in a Chapter 7 case may be the best way to go for you. But here are some very common problems that arise.
1. A potential large debt if your vehicle is repossessed in the future: In a Chapter 7 case, if you own on your vehicle you almost always have to sign a “reaffirmation agreement” to keep that vehicle. That agreement makes you continuably liable for the full balance on your vehicle loan. That’s true even if that balance is more than the vehicle is worth. That puts you at risk for owing a substantial amount of money months or even years after your bankruptcy case is finished if you are ever not able to make the payments.
2. High monthly payment: A “reaffirmation agreement” in a Chapter 7 case almost always requires you to maintain your full contractual monthly payment on the vehicle loan regardless whether or not you can afford it. You have to choose between right away surrendering the vehicle and writing off any debt, or else reaffirming the debt and having the challenge of making payments you can’t afford.
3. The challenge of catching up quickly on late payments: If you are behind on your vehicle payments, with a Chapter 7 reaffirmation you have very little time to catch up—usually within just a month or two after your bankruptcy case is filed. If you want to keep your vehicle under Chapter 7, you must bring it current very quickly so that your lender will let you keep it and reaffirm the loan.
4. No protection from repossession: After a Chapter 7 case is completed—usually only about 3-4 months after it is filed—the “automatic stay” protection against your creditors expires. So if you have a financial setback later and are late on your monthly payment or you let your vehicle insurance lapse—even for a matter of days—your vehicle could get repossessed. That would leave you with no vehicle but likely still owing on the vehicle loan.
“Reaffirmation” Problems Solved by Chapter 13 “Cramdown”
If you owe more on your vehicle than it is worth, AND IF you got your vehicle loan more than 910 days (about 2 and a half years) before your Chapter 13 case is filed, you can do a “cramdown” on that loan. This means that you will:
1. usually pay less for your vehicle than your contract would have required, often thousands of dollars less;
2. usually lower your monthly vehicle loan payments, sometimes significantly;
3. avoid needing to catch up on any late monthly payments; and
4. be protected from vehicle repossession during the 3-to-5-year Chapter 13 payment plan, if you do what that plan requires.
How “Cramdown” Works
“Cramdown” is the informal name for a procedure for legally rewriting a vehicle loan, lowering how much you pay for your vehicle based on its fair market value.
Your new payment is based on the amount of the secured portion of the loan—the value of the vehicle. That portion of the full balance is often paid at a lower interest rate than the contractual rate, and the payments can often be stretched out over a longer period. Paying less, at a lower interest rate, and often over a longer period, results in a lower monthly payment, often much lower.
The remaining unsecured portion of the vehicle loan balance, the part that exceeds the value of the vehicle, almost never has to be paid in full. Often you pay only little of that portion, and you may even pay none of it. You pay it at whatever percentage your other unsecured debts are being paid, based on what you can afford. Often this unsecured portion of the vehicle debt does not increase what you would otherwise pay to all your creditors.
Again, “cramdown” is only available under Chapter 13.