If your car is worth less than you owe on it, you may be able to reduce your monthly payment and the total amount you pay back, using the 910-Day Cramdown Rule.
Vehicles depreciate quickly, often at a rate that is much faster than the balance is paid down. Within Chapter 13 bankruptcy law, however, there is a special opportunity to reduce the loan balance to the car’s “fair market value,” and reduce the interest rate of the loan as well.
Your Car in Chapter 13 Bankruptcy
One attractive option in a Chapter 13 bankruptcy is the “cramdown.” This is a good way to keep personal property that you might not be able to, otherwise. In a case where the cramdown rule is applied, secured debts are reduced to the value of the property that is securing the debt.
For a car loan, the car itself is securing the debt—you agree when taking out the loan that if you stop paying, the seller can repossess (take back) the car. Therefore, in this case, the principal balance will be reduced to the car’s current value.
There is one main rule: in order to qualify, you must have financed the vehicle more than 910 days (two and a half years) prior to the date you filed for bankruptcy. Due to this limitation, this process is known as the 910-Day Cramdown Rule.
An Example
Two and a half years after financing your car, you file for Chapter 13 bankruptcy. You owe $10,000 on your car, but the car’s market value is only $6,000.
The bankruptcy court can reduce the amount you owe to $6,000, which you will pay through your Chapter 13 repayment plan. You get to keep your car, and you save $4,000 in principal.
What’s more, your interest rate is determined by the bankruptcy court, not the auto lender. Your monthly car payment will likely drop to a fraction of what it was.
Where does that $4,000 go? The money that you saved becomes unsecured debt, which you only pay to the extent that you are able to during your 3-5-year Chapter 13 plan. At the end of the term, the unpaid balance is discharged. That means at the end of your bankruptcy, you’ll own your car, free and clear.
Chapter 13 vs. Chapter 7
Cramdowns do not exist in Chapter 7 bankruptcies. If you want to keep your car under Chapter 7, you must continue to make the full payments. Otherwise, the lender will have the option to repossess your vehicle.
Even in a Chapter 13 bankruptcy, you won’t qualify for a cramdown if you took out the loan more recently than 910 days prior to filing. Additional exceptions apply, as well. You cannot cram down a loan for a business vehicle or a vehicle that is driven by someone other than yourself.
Controversy Over the Cramdown Rule
The 910-Day Rule was implemented as a part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which was passed by Congress in 2005. Unfortunately, the way the cramdown rule was written has left a lot up to interpretation.
Although the law was intended to be universal, experienced bankruptcy attorneys have found that bankruptcy courts across the country have arrived at varying interpretations of what can and cannot be done with a car loan in a bankruptcy filing.
These differences in legal opinion make it absolutely mandatory that you work with an experienced attorney. If you are considering filing for bankruptcy, please contact us to schedule a complimentary consultation with St. Louis and Southern Illinois bankruptcy attorney Michael J. Benson. As a licensed bankruptcy attorney and Certified Public Accountant (CPA), Michael has the experience and expertise you need to help you keep your car and get a fresh financial start.
