The Extraordinary Tools of Bankruptcy: Rewriting the Payment Terms of Your Vehicle Loan through “Cramdown”
If your vehicle loan is more than two and a half years old, you can maybe lower both your monthly payment and the total amount to be paid.
Being Stuck with an Upside Down Vehicle Loan
Unless you’ve put a lot of money down when you bought your car or truck, or are getting close to paying of the loan, there’s a good chance that you owe more on it than it is worth. You may also be struggling to keep up the payments on this loan, but trying hard to do so because you desperately need this vehicle.
You need to keep up the payments not just because you need the vehicle. If you surrender it to your lender, or it was repossessed, you could easily still owe thousands of dollars of “deficiency balance,” the amount you would owe on the loan after the surrender or repossession. The amount is often shockingly high because the vehicle is usually sold at an auto auction, so the amount credited to your balance is lower than you’d expect, and the costs of repossession/surrender and sale, plus late charges and other fees and continuing interest, are all added to the balance.
So you are really stuck, between on the one hand trying to pay for a vehicle that costs too much each month, and on the other hand owing thousands of dollars if you lose that vehicle.
Chapter 7 “Straight Bankruptcy” Not Much Help
Regular bankruptcy can’t re-write the terms of your vehicle loan. It CAN get you out of your loan by surrendering the vehicle and discharging (legally writing off) the deficiency balance.
But if you want to keep the vehicle, in a Chapter 7 case you would almost always be stuck with the contract terms. And usually you would be required to “reaffirm” the debt, that is, to exclude it from the discharge of your debts. This means that if later you surrendered the vehicle or it was repossessed, you would owe a deficiency balance, in spite of having earlier filed bankruptcy.
And if you were behind on your monthly payments, almost always under Chapter 7 your lender could require you to quickly catch up—within a month or two—or else you’d lose the vehicle.
Chapter 13 “Cramdown” Can Solve All This
Cramdown is an informal term for the procedure under Chapter 13 “adjustment of debts” for legally re-writing the loan in situations in which the vehicle is worth less than you owe.
The way this works is that the balance on the vehicle loan is divided into two: the secured and unsecured portions.
The amount of the secured portion is the value of the vehicle. The loan is sensibly considered secured only to the extent of the value of the collateral which secures it.
The amount of the unsecured portion is the rest of the loan. This portion of the loan is considered unsecured because the value of the collateral is not large enough to secure it.
The secured portion must be paid in full during the life of the Chapter 13 case. But because the value of the vehicle is often significantly less than the loan balance, and because the payments can often be stretched over a longer period, the resulting monthly payment is often much lower than the usual contractual payment.
The unsecured portion is paid as part of the pool of other “general unsecured” debts you owe—usually paid only to the extent that you have money available during the course of your Chapter 13 case to pay them. Often only a small part of the “general unsecured” debts is paid because your money goes instead first to the secured portion of the vehicle loan, and then to “priority debts” like recent taxes, and child and spousal support arrearage.
Also, particularly if your vehicle loan has a particularly high interest rate, you can often also reduce that rate, which also helps reduce the monthly payment on the loan.
Qualifying for “Cramdown”
Your vehicle loan must have been made more than 910 days (slightly less than two and a half years) before your Chapter 13 case is filed. And again, cramdown is ONLY available with a three-to-five year Chapter 13 case, not a “straight bankruptcy” Chapter 7 one.
Let’s make sense of “cramdown” with an example. Assume you owe $15,000 on a truck worth $10,000, with monthly payments of $400 and an interest rate of 8%. You’re late on one monthly payment, with another payment coming due shortly. You are at risk of repossession.
With “cramdown” you can pay the $10,000 secured portion over time through your Chapter 13 plan payments. Assuming an interest rate of 5% and a new Chapter 13 repayment term of five years, the monthly payment would be only about $189. That’s a significant reduction from the $400 contractual monthly payment.
Also, the late payment(s) would not have to be brought current.
The unsecured portion of the vehicle loan—the remaining $5,000—would be paid whatever percentage all your unsecured creditors were being paid. For sake of this illustration, assume that the general unsecured creditors are being paid 10%. In this case the vehicle lender is being paid $10,000, at a reduced interest rate, plus 10% of $5,000, or $10,000 plus $500, for a total of $10,500 plus interest. This is in contrast to the contractual balance of $15,000 plus interest, so we’re looking at a savings of at least $3,500. And this comes with a reduction in the monthly payment from $400 down to about $189.