Saving Your Car in Chapter 13 Bankruptcy

Bad loans and depreciation can lead to a person owing more on a vehicle than it is worth. As a bankruptcy attorney in Arkansas, I have seen clients with auto loans more than two times the value of their vehicles and at extremely high interest rates.

If your vehicle is worth less than you owe, or you are paying excessive interest, filing a Chapter 13 bankruptcy can reduce your balance, cut your interest rate, and slash your payment. A “cramdown” of a car loan is a major benefit available in Chapter 13 Bankruptcy under 11 U.S.C. § 506(a) of the bankruptcy code. (NOTE: 11 U.S.C. § 506(a) of the bankruptcy code enables a debtor to split a creditor’s claim, treating the claim, up to the value of the collateral, as a secured claim while treating as unsecured the amount of the claim that exceeds the value of the collateral. Section 506(a) states in relevant part that “[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor’s interest . . . is less than the amount of such allowed claim.”).

“Cramming down” your car loan balance in Chapter 13 reduces the balance to the vehicle’s fair market value. This new lower amount is paid through your Chapter 13 plan. Any remaining balance becomes an unsecured debt like your credit cards, medical bills, etc. Because many Chapter 13 debtors pay only a small portion of their unsecured debt (often cents on the dollar), cramming down the balance can save you thousands of dollars.

To be eligible to cram down the balance on a car loan, you must have purchased the vehicle at least 910 days (a little over 30 months or 2.5 years) from the date that you filed your Chapter 13 bankruptcy. The 910-day rule also applies to cramming down interest rates.

Example: Roger has a car worth $12,500, but the balance on his auto loan is $18,500. His payment is $511 per month at 6% interest. In Chapter 13, Roger can cram down the balance to $12,500. Therefore, his payments would be based upon this new lower balance. The remaining $6000 becomes an unsecured debt, which will most likely be paid back at cents on the dollar. Roger’s payments will be reduced to $241 per month when paid through a 60-month Chapter 13 plan.

Contact our law firm today to see how we can save your car and save you money on your car loan by filing a Chapter 13 bankruptcy.

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