If you have a relatively new vehicle loan, waiting until you’ve had it for at least two and a half years can save you thousands of dollars.
Timing is Everything
One of the countless reasons it is crucial for you to get legal advice from a good bankruptcy attorney is to take advantage of laws about the timing for filing your case.
One of the best examples of this is the vehicle loan cramdown law. If you qualify for cramdown, you can keep your vehicle in spite of potentially paying hundreds of dollars less per month and thousands of dollars less overall, before owning it free and clear.
Chapter 13 Only
Vehicle loan cramdowns are only available under a Chapter 13 “adjustment of debts” case. It cannot be done under Chapter 7 “straight bankruptcy.” There you are usually stuck with either 1) keeping the vehicle by making full payments under the contract terms (including quickly catching up on any back payments) or else 2) surrendering the vehicle to your lender and discharging (legally writing off) any possible balance you owe on it.
What is Cramdown, and Why Is It So Good?
Cramdown is procedure for legally rewriting a vehicle loan, usually reducing both the monthly payment and the total amount to be paid for the vehicle. A cramdown adjusts how much you have to pay for your vehicle based on its fair market value. It also often results in a reduced interest rate, saving some more money there. It also often stretches out the payments over a longer period. These can combine to result in a significantly reduced monthly payment, as well as a big savings overall.
Qualifying for Cramdown
First, cramdown only makes sense and is only available if your vehicle is worth less than the balance on its loan.
And second, your vehicle loan must have been entered into more than 910 days (slightly less than two and a half years) before your Chapter 13 case is filed.
Cramdown in Practice
And that’s where the timing opportunity comes in. Waiting to file your case until after the 910 days has passed can make a huge difference.
Let’s say you have a vehicle that you bought and financed 28 months ago (about 850 days ago) with a current loan balance of $20,000 and month payments of $500 per month at 8% interest.
If you filed a Chapter 7 case and wanted to keep the vehicle you would almost always have to accept those terms. The fact that the vehicle was worth only $14,000 would make no difference. With interest, you would end up paying about $23,340 for that vehicle over the following 47 or so months, nearly $10,000 more than it is currently worth. Also, you would likely be required to sign a “reaffirmation agreement.” That would exclude the vehicle loan from the discharge of debts, so that if you ever failed to make the payments and ended up surrendering the vehicle or having it repossessed, you would likely be liable for many thousands of dollars—the difference between what you owed on it and what it sold at an auto auction.
Under a Chapter 13 filed at this 28-month point after the purchase and financing, you would not qualify for cramdown. That is, you could not change the terms of the contract. You would essentially pay the same as under Chapter 7 above.
However, if you waited a couple months to file your Chapter 13 case until after 910 days (about 30 months) had passed from when you had financed your vehicle, then you would qualify for cramdown. The $20,000 debt would be divided into a secured portion of $14,000—the value of the vehicle—and an unsecured portion of $6,000. The $14,000 secured portion would be paid at likely a reduced interest rate of about 4%, with payments stretched out as long as 60 months, resulting in a monthly payment of about $258. With interest, over 60 months this would total about $15,470, nearly $8,000 less than under the contract terms calculated above.
The remaining unsecured portion of $6,000 would be paid only to the extent that you would have available funds in your budget to pay to general unsecured creditors. Furthermore, that $6,000 amount is just added to the pool of your other general unsecured creditors, of which you would often be required to pay only a certain limited amount based on your budget (regardless how much you owe). So that additional unsecured debt from your vehicle will often not have any effect on how much you pay to your creditors overall.
So in effect, in this scenario, by filing a Chapter 13 case instead of a Chapter 7 one, and waiting to file until after the 910 days had passed, your monthly vehicle payments would have gone down from $500 to about $258, you would have saved nearly $8,000 overall, and in spite of paying so much less you would still own your vehicle free and clear at the end of your case.