Upside Down on Car Loan – Chapter 13 Cram Down Provisions and Chapter …
Clients often find themselves in need of debt relief because of a car loan gone badly.
Modern day society necessitates owning and maintaining an automobile which sometimes evolves into a devastating financial burden. Lenders are quick in financing vehicles knowing borrowers highly prioritize automobile transportation over most other financial obligations. already borrowers with bad credit are fitted into an automobile financing packages priced at high interest rates to compensate aggressive lenders for the additional risk.
Financial difficulty often arises from auto financing. The happy car buyer drives their new means off the lot financed nearly 100%. As the saying goes, almost closest thereafter, the new means depreciates in value several thousand dollars before it is already hits the highway.
Automobile transportation costs $4,000.00 to $6,000.00 yearly including auto loan payments, liability and collision insurance, repairs and maintenance and gasoline.
Havoc begins when an unexpected car repair not covered by warranty, or a motor means accident, unexpectedly and significantly decreases the value of the means far below the noticeable loan balance owed to the bank. Or, perhaps more harmlessly, on a trade- in for a new means where eager car salespersons and lenders agree to take in your old means on trade, and throw the remaining noticeable balance from your old car loan (for a little higher payment) on the back-end of your new auto loan leaving the new car buyer considerably upside-down on the new means buy.
These situations leave the borrower in a difficult situation where sizable portions of income are devoted towards covering an unsecured auto debt obligation that is of no use towards sustaining modest costs of necessities for family living.
Under certain circumstances relief from these devastating financial predicaments can be obtained by a bankruptcy filing.
CHAPTER 13 CRAM DOWN PROVISIONS
Under Chapter 13 of the United States Bankruptcy Code, Debtors are permitted to Cram Down the unsecured portion of their auto loans to the fair market value of the means securing the loan. This requires debtors to pay back only the secured portion of the auto loan, but the unsecured balance is treated as a general unsecured creditors providing substantial assistance for the Debtor, permitting Debtor to only pay a small fraction of the unsecured portion of the auto loan debt that is owed.
As an example, lets suppose our debtor owns a car worth $10,000.00 and there is an auto loan with a payoff balance of $20,000.00. In this scenario, the loan is only slightly secured. The auto lender is secured only to the extent of the value of the means or $10,000.00. The remaining $10,000.00 balance on the loan is unsecured. In this situation the Bankruptcy Code affords the Debtor the right to cut off the unsecured portion of the auto loan and treat that portion of the loan as unsecured. So, if General Unsecured Creditors were only receiving a dividend of 20%, the auto lender would receive only $2,000.00 on its unsecured portion of the auto loan.
These situations become sticky between Debtor and Lender because often disagreements arise as to the correct value of the means. Your bankruptcy attorney will need to negotiate a settlement over the valuation before confirmation of the Debtors Chapter 13 plan.
Valuation is guided under provisions of the United States Bankruptcy code, specifically 11 U.S. Code § 506 – Determination of Secured position.
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 character securing an allowed claim shall be determined based on the substitute value of such character as of the date of the filing of the appeal without deduction for costs of sale or marketing. With respect to character acquired for personal, family, or household purposes, substitute value shall average the price a retail merchant would charge for character of that kind considering the age and condition of the character at the time value is determined emphasis additional
The Cram Down provision under the bankruptcy code also provides for a reduction of the interest rate on the auto loan. Often Debtors find themselves shelling out enormous auto payments used to cover expensive interest rates auto lenders often charge to risky borrowers.
An interesting exception was enacted under the 2005 Amendments to the United States Bankruptcy Code prohibiting cram downs where the buy 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 must consider timing of a Chapter 13 filing if they desire to escape the burden of a burdensome auto loan debt. Bankruptcy rules require car loans taken out within 2 ½ years of the bankruptcy filing must be paid as agreed.
CHAPTER 7 REDEMPTION
Cram downs are not permitted under Chapter 7 bankruptcy (or straight bankruptcy). But, Chapter 7 debtors are permitted to redeem personal character under 11 U.S.C. §722.
11 U.S.C. §722 provides as follows:
An individual debtor may… redeem tangible personal character intended chiefly for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such character is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in complete at the time of redemption. emphasis additional
Redemption, however, can be difficult under Chapter 7 because debtors must pay upfront in complete a lump sum of cash an amount sufficient to pay the secured portion of the auto loan measured by the fair market value of the means at the time Debtor seeks to redeem the means. Chapter 7 does not permit a restructuring of the loan, but sometimes the auto lender will accept payments over time, but usually within a short term.
If your means is worth less than you owe on it, bankruptcy options can be advantageous towards affording you to retain your means and move towards better financial health.
Chapter 13 can reduce or cram down your loan balance and interest rates thereby lowering your auto payment making it affordable. Chapter 13 also enables you to restructure past due auto payments and spread them over the term of the Chapter 13 plan so you can provide to catch up the past due payments within your personal financial method.
Chapter 7 bankruptcy does not adjust to restructuring of loan repayments but the §722 redemption provisions allow debtors to buy their vehicles out of bankruptcy for the fair market value of the means, leaving the unsecured portion of the debt discharged under the Chapter 7 bankruptcy.