Keep Your Car and Lower Your Payment with Chapter 13 "Cram Down"

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Is your monthly car payment too high? Are you struggling to pay your monthly bills, and are in danger of falling behind or have already fallen behind? Chances are you are reading this article because you have a monthly car payment and other bills you are having trouble paying, and you are considering filing for bankruptcy.

You may have heard that filing a bankruptcy petition entitles you to modify your car loan and pay less for your car than you promised to pay when you purchased it. This is true, if certain conditions are met. This article addresses the effect of filing a Chapter 13 bankruptcy petition upon your obligations under a retail installment contract for the purchase of an automobile.

In other words, this article will tell you the basics of when and how you can modify your car loan, pay less for your car over a greater amount of time, and keep your car.

Contents of this Article

What Does "Cram Down" Mean?

When you file a Chapter 13 bankruptcy petition, your creditors are notified that they can file a "claim" in the amount owed by you. If you own a car but still owe money on the loan, your creditor’s claim for the amount you owe is "secured" by that car. However, the timing of the purchase of the car relative to the filing for bankruptcy may serve to greatly reduce that secured creditor’s claim to what the car is currently worth. This reduction is called a "cram down" and is available when you file your Chapter 13 bankruptcy petition 910 days or more after purchasing your car. Any sooner, and you will have to pay the full loan balance owed to that creditor. But if your loan qualifies, and your loan balance is greater than the amount the car is currently worth, you can force that creditor to accept payment of the car’s current value in full satisfaction of the loan just by filing a Chapter 13 bankruptcy petition and proposing to pay the car’s current value over time through your Chapter 13 plan.

Example of "Cramming Down" an Auto Loan

This may sound complicated at first, but consider this hypothetical example: let’s say you took out a five-year loan when you purchased your car four years ago (that’s 365 days/year multiplied by four years, which is somewhat greater than the 910 days required). With a year left on the loan term, you now owe $6,000 on the loan and you file your Chapter 13 bankruptcy petition. Your creditor files a secured claim for $6,000, but you can show the vehicle is currently worth only $2,500. In this instance you can cram that creditor down and pay that creditor only the $2,500 through your Chapter 13 plan in full satisfaction of this loan and the creditor’s claim.

Extend Your Repayment Time

"Cram down" is a powerful tool for a second reason: in this example, not only will your obligation to this creditor be reduced from $6,000 to $2,500, but you will get more time to pay that $2,500 than the year left on the loan term, because that creditor will be paid the $2,500 through your Chapter 13 plan which can typically take three to five years to complete. Therefore, “cram down” not only allows you to pay less for your car in total, but gives you a longer period of time to pay it off, and upon successful completion of your Chapter 13 plan, the car is yours.

Impact on Co-Signers

Although this simple scenario is an accurate illustration of the basic principles of "cram down," many contingencies commonly arise that will affect your ability to cram down a car loan and the extent to which your loan obligation can be reduced. For example, if there was a co-signer on the loan who is not in bankruptcy, that individual’s obligation for the full amount of the loan is not affected by your bankruptcy. This is something you want to consider when contemplating a cram down, and you should consult with your attorney about the ramifications of that for you and for the co-signer.

Interest Rate and Creditor Resistance

Also, the issue of the appropriate interest rate to be applied is a hot subject for debate and requires skillful negotiation with the creditor to avoid paying more over time than you are required to pay. Last, it is understandable that creditors will resist being crammed down. One way in which they do this is to challenge your asserted value of the car and the valuation method used, and assert in turn that the car is worth more than you say it is. The condition of your car and its current value and how to calculate that value are important factors in calculating the cram down, and these are frequently issues that are subject to costly litigation if negotiation is not successful. The issue of valuation also arises in those close cases where the creditor asserts you have "equity" in the vehicle (in other words, you owe less on your loan than what the car is currently worth) and that therefore you must pay the amount due under the loan. However, if you can show that your car is in fact worth less than the amount you owe on the loan, you can still cram this creditor down and pay less.

This is Not Advice for Filing Chapter 13

Before we conclude, please take note of this important caveat: this article is not legal advice, nor is it intended to be legal advice. The purpose of this article is merely to illustrate one possible advantage of filing a Chapter 13 bankruptcy petition if you have a car loan that qualifies for "cram down." This illustration is but one way in which the Bankruptcy Code can be a powerful tool for an honest but unfortunate debtor like yourself, when utilized fully. While it is certainly possible to file your petition pro se, an experienced bankruptcy attorney can guide you through the intricacies of "cram down" and ensure that you pay only what you need to pay for your car and no more.