If you are struggling to pay your monthly car payments and you need to reduce either your monthly payment or your interest then you should consider a vehicle cramdown. Chapter 13 bankruptcy allows you to reduce your car loan to the fair market value of the vehicle and in many instances reduce the interest that you pay on the loan. If you are making monthly car payments on a vehicle that is worth less than your outstanding car loan balance then a vehicle cramdown can help you make your vehicle payments more affordable.
How Does a Car Cramdown Work?
Car loans are usually secured by the car itself, which means that if you don't make payments the lender can take the car back (repossess the car). If your vehicle is worth substantially less than what is owed on the loan and the vehicle was purchased more than 910 days (2.5 years) before filing for bankruptcy you are eligible for a cramdown. Your loan will be reduced to the fair market value of the vehicle. The interest rate may be reduced to prime rate plus a risk premium, which often is much less than the current interest rate under the loan.
For example, say you purchased a vehicle 910 days ago, the outstanding loan balance is $15,000, your interest rate is 10%, and the fair market value of the vehicle is $8,500. In your Chapter 13 plan you propose to pay back the current value of the vehicle ($8,500) overthe length of your repayment plan. You can also propose an interest rate of prime rate plus a risk premium. The remaining loan amount of $6,500 is treated as unsecured debt and paid back in the same proportion as the rest of your unsecured creditors.
What is Fair Market Value?
For purposes of vehible cramdowns, you use the replacement value of the vehicle. This is what you could sell the car for on the market given its age and condition.
How Does A Cramdown Help You?
A vehicle cramdown helps by:
- reducing the amount you have to pay back
- possibly increasing the length of time you have to repay the loan (for example, if you have two years left on your car loan and your plan will last for five years, you get an extra three years to repay the loan), and
- reducing the interest rate.
