Do you know when your vehicle loan qualifies for a cramdown? Let’s start with exactly a “cramdown” is. While this term cannot be found in the federal Bankruptcy Code, it is still a relevant term. It’s a procedure under Chapter 13 bankruptcy law for legally rewriting the loan. Why would you want to do this? Usually in order to decrease your monthly payment as well as the total you will end up paying for your vehicle. This will in turn reduce your interest rate while stretching the payments over a longer period of time. By reducing your monthly payment, you will then save thousands of dollars on your car.
Qualifying for a Cramdown
- Your vehicle MUST be worth less than the balance on your loan.
- Crawmdowns are only available under Chapter 13, not Chapter 7. If you are filing Chapter 7 bankruptcy, you will not qualify for a cramdown.
- Your car loan was entered into 910 days (roughly 2.5 years) before you filed Chapter 13 bankruptcy.
Getting a Vehicle Cramdown
The most important part is #3: when you entered into your car loan. When you go to see your bankruptcy attorney, bring your vehicle loan paperwork to see if you can qualify for this advantage. It might end up making a huge difference for you.
Here’s an example:
Perhaps you purchased and financed your car exactly 900 days ago. New car cost: $21,500 (and you didn’t get a good deal). Let’s say that your previous vehicle died and you didn’t feel that trying to save it was worth the exorbitant cost. However, you have to commute to work somehow. So you get a credit card cash advance of $500 to put as a down payment and then you financed the vehicle as follows: $21,000 at 8% over 5 years. Therefore, your monthly payments are $425.
Now almost 2.5 years after the fact, you have paid $9,500 and still owe $11,500. If you decide that you wanted to hold onto your car but you have filed either a Chapter 7 or Chapter 13 case before the 910-day mark, you would have to keep up the payments as per the contract terms. This would amount to about $12,650 (or more depending).
Let’s imagine a world in which you had waited just ten more days to file that Chapter 13 case. Then you could (in theory), could qualify for a cramdown. You still owe $11,500 and your car is worth about $7,500. Your loan is said to be secured to the extent of that $7,500 and that remaining $4,000 of the loan isn’t secured. So the secured portion of $7,500 would be paid through monthly payments under your Chapter 13 plan. That extra $4,000 unsecured portion is similar to your unsecured debts which are usually only paid if you have extra money to do so.
Under Chapter 13, you pay that $7,500 and you interest rate will often be lower than the rate in your contract. Paying a reduced amount ($7,5000 instead of $11,500) at a lower interest rate will produce a lower monthly payment for you. This payment can be further reduced by extending your repayment term further than what your contract provided (up to a max of five years from the date of filing your Chapter 13 case).
If we were to assume in this example that the interest rate is 5% and the repayment term is five years, then your payment on $7,500 would be less than $142 a month! With interest, your remaining debts on your vehicle would be about $8,492 whereas you would’ve paid $12,650. You save $4,158!
Even though your payments on your vehicle would be about 2.5 years longer, you would still pay it at a lower interest rate (5% versus 8%). Imagine paying $7,500 instead of $11,500!
So by being aware and waiting to file your Chapter 13 case until after the 910-day period, you could have reduced your monthly car from $425 to $142. Make sure you tell your bankruptcy attorney about any purchases you have made within the last 910 days.
|Normal Loan Payments||Car Cramdown Under Chapter 13|
|Cost of Car||21,000 (with a $500 down payment)||21,000 (with a $500 down payment)|
|Money You Owe||$11,500||$7,500|
|Interest To Pay||$1,150||$992|