Once you have determined that filing for bankruptcy is in your best interest, you will need to decide whether to file under Chapter 7 or Chapter 13. If there are particular assets, such as a vehicle, you are concerned about losing during the bankruptcy process, which chapter you file under can affect your ability to keep your property. If you are currently financing your vehicle and you owe more than the vehicle is worth or your loan has extremely high interest rates, then filing under Chapter 13 will be your better option if you wish to keep the vehicle and not have it repossessed.
Under Chapter 13, you are eligible to request a “cramdown” of your vehicle loan. Cramming down a loan can significantly lower the debt owed, amount of interest due, or lower your monthly payments. This option is not available under Chapter 7 bankruptcy.
In order to, qualify for the Cramdown option under Chapter 13 bankruptcy, you must have purchased the vehicle at least 910 days prior to filing for bankruptcy. Lenders may waive the 910 rule if you are seeking to cramdown the interest rate if you are close to the 910 day limit, but it is at their own discretion to do so.
Cramming Down the Balance of a Car Loan
An unexpected depreciation of a vehicle (like an accident) or high interest rates can lead an individual to become “upside down” on their car loan. Under Chapter 13 bankruptcy, cramming down the balance of a car loan will lower the balance to the fair market value of the vehicle determined by the Kelly Blue Book or NADA value estimate. The difference between the fair market value and the original debt becomes an unsecured debt which the filer typically only has to repay at cents on the dollar.
Cramming Down the Interest of a Car Loan
Cramming down the interest rate is exactly what it sounds like – a way for you to reduce your exceptionally high interest rate. Even if the new rate has only dropped by a few points, it can still save you thousands of dollars overall. Typically, the crammed down rate will be one point above the current prime rate, which as of the date of this post is 4.0%.
Cramming Down the Monthly Payments of a Car Loan
You can significantly lower your monthly payments if you extend the length of the term for repayment. If you take the balance you owe and stretch it out between 60 months, your payments would be much lower than if you paid it over the course of 36 months.
Utilizing all three options – cramming down the balance, cramming down the interest rate and cramming down the monthly payment by increasing the term can maximize the benefits and savings of the “Cramdown” option under Chapter 13 bankruptcy.