July 19, 2016
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 and cut your payment. Only Chapter 13 debtors receive the benefit of “cramming down” their car loan.
Bad car loans can be devastating financially, and all too often they are a major factor in a debtor filing for bankruptcy. However, it is not only debtors with bad car loans who benefit from Chapter 13 cram downs. Unexpected depreciation of a vehicle’s value and high interest rates will quickly place almost anyone underwater on a car loan.
Cramming Down the Balance on an Auto Loan
In a “cram down” situation, the Chapter 13 debtor reduces its balance to the vehicle’s fair market value. The new lower amount is paid through the 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 not accounted for the Bluebook or NADA value becomes an unsecured debt. 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 Loan
In addition to cramming down the value of the vehicle, the bankruptcy code allows debtors to cram down the interest rate on a vehicle loan. Typically, the interest rate can be crammed down to one or two points over prime. The current prime rate is 3.25%. Thus, the court will allow a cram down of the interest rate in a range of 4.25% to 5.25%. 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. It is worth noting that the 910 rule does not apply to cramming down the interest. The interest rate can be crammed down in accordance with the rules above.
Exception to the 910-Day Rule
The loan isn’t purchase money. This exception to the application of 506 was designed to protect car dealers, not necessarily everyone who makes a loan secured by a car. However, it can apply to individual debtors when the car loan has been refinanced or the car was pledged to secure a personal loan..
The vehicle is a business vehicle. Either the nature of the vehicle or the debtor’s business should tip you to a loan that may be outside the 910 vehicle. If it’s a delivery van, a pickup with racks, or an SUV sufficient to haul a trailer for the debtor’s business, you may have a transaction that doesn’t involve a “motor vehicle for the personal use of the debtor.”
The vehicle is driven by someone other than the debtor. An additional consideration is whether the vehicle is driven by a non debtor. The statute speaks in terms of the debtor’s personal use, so perhaps the vehicle for the teenager or college student, or even non-debtor spouse is outside the protection of 910 rule.