Posted on: 3 March 2015
Americans are borrowing more money to buy cars. Despite the economy being in a recessive state, Americans are buying more cars with an increase of 15.6 million units in auto sales. Instead of paying for the vehicle in full, most buyers are opting for car loans instead, as interest rates have lowered. There were 60.5 million car loans taken out in 2014. If you have taken out a car loan previously, and your car is now worth less than what you owe on it, you may be able to apply for a cramdown if you file for chapter 13 bankruptcy.
Figuring Out the Basics of a Cramdown
Cramdowns are only available for those who file for bankruptcy under chapter 13. Because you owe more on the car than the value itself, you can "cramdown" the car loans and the interest rates while still being able to keep your car. This is due to the fact that a car depreciates in value with time. Here's how a cramdown works.
Let's say that you still owe $25,000 on your car; however, your car is only worth $10,000 on the market right now. If you were to apply for chapter 7 bankruptcy, your trustee would liquidate your car for approximately $10,000, and this $10,000 would be used to pay back the creditor leaving $15,000 of debt. Since your creditor isn't going to receive anything more than that, you can propose a cramdown to the creditor if you are filing for bankruptcy under chapter 13. Your proposal will basically involve paying back the retail value of the vehicle during the 3 or 5 year repayment plan, which in this case would be $10,000.
The additional debt that you owe on the car will then be considered as an unsecured debt since it technically is no longer backed up by an asset. This unsecured debt will be dismissed at the end of your bankruptcy term, and you will no longer be held liable for paying it.
Reducing the Interest Rate as Well
By applying for a cramdown, you are automatically reducing the amount of the car loan that you are required to pay; however, the benefits do not stop there. You can also reduce the amount of interest rate that you are required to pay as well during the term of your bankruptcy. Most of the time, the court will allow you to pay an interest rate that is slightly above the prime rate. This rate is generally quite a bit lower than the interest rate that you would have signed when buying your car. The bankruptcy courts will determine the reduction that you will get for the interest loan.
Taking Note of Limitations
Although a cramdown may seem like the answer to all of your prayers, there is a catch. In order to be eligible for a cramdown, you must have purchased your car at least 910 days before you have filed for bankruptcy. In addition, you must be able to repay the value of your car in full by the time that your bankruptcy term has ended. This can be quite difficult depending on what the retail value of your car is. For example, those who have purchased a luxury car may owe any upwards of several tens of thousands of dollars, which may not be a feasible amount to pay off for such a short period of time.
To determine whether you are eligible for a cramdown or whether a cramdown will help you reduce your debts, speak with a bankruptcy trustee immediately. A cramdown can help you not only reduce your car loan, but also allow you to keep your vehicle. This is particularly important for those who may rely on their vehicle for getting to and from work.Share