Bankruptcy Timing for Vehicle Cramdown

Law Office of Robert L. Firth Nov. 9, 2020

Cramdown usually lowers your monthly vehicle loan payment and the total amount you must pay. To qualify the loan must be more than 910 days old.

We’re in the midst of a series on filing your bankruptcy case with the best timing. Today we get into the right timing to be able to cram down your vehicle loan. Cramdown is a potentially huge benefit, so it’s important to know how to take advantage of it. One key consideration in this is the timing of your bankruptcy filing.

Advantages of Vehicle Loan Cramdown

In a Chapter 7 “straight bankruptcy” case, if you have a vehicle loan you must “take it or leave it.” To keep the vehicle, you have to “reaffirm” the vehicle loan. That means you agree to remain fully liable on the debt. It usually means you are stuck with the regular monthly payment, even if you can’t afford it. You can’t change the interest rate, even if it’s high and jacking up how much you must pay. You are stuck with the full balance on the loan, even if the vehicle is worth much less. This includes late fees and any other contractual charges. If you’re behind almost always you have to quickly catch up. Usually the only other choice is to “leave” it—surrender the vehicle and discharge (write-off) the vehicle’s debt. If you need and want to keep your vehicle, that’s not an option.

In contrast, a Chapter 13 vehicle cramdown can be much better in all these respects. Cramdown can reduce your monthly vehicle loan payment. It can reduce the total amount you pay on that debt. You can often reduce the interest rate. You may well not need to pay any accrued late fees and other contractual costs. And you generally don’t need to catch up on late payments. You get all these benefits, IF you qualify for cramdown.

Qualifying for Cramdown

We’ll get to the crucial timing qualification in a moment. But let’s first quickly cover a couple other ones.

First, as implied above, a vehicle loan cramdown is only available under Chapter 13 “adjustment of debts.” Not in a Chapter 7 case.

Second, cramdown is only available for personal vehicles, not business ones. The vehicle must be one “acquired for the personal use of the debtor.” U.S. Bankruptcy Code, Section 1325(a)(hanging paragraph after (9)).

Third, cramdown works best when your vehicle is worth less than you owe on it. The term comes from the power to “cram” the balance on the loan “down” to value of the vehicle. This ability comes from the fact that the law treats secured debts differently than unsecured ones. It favors secured debts because a creditor has property of some sort backing up the debt. This gives the creditor property rights that do not come with an unsecured debt. Then, very importantly, Chapter 13 allows you to separate the secured part of vehicle loan debt from the unsecured part. The amount of the secured part equals the value of the vehicle. The unsecured part is the remaining part, that which is beyond the vehicle value. Cramdown essentially allows you to rewrite your loan to pay the secured part only. The unsecured part gets thrown in with the rest of your unsecured debts. You pay those only if and to the extent there’s money left over for them.

To make this clearer, let’s say your vehicle is worth $10,000 but you owe $15,000. In this example the secured part of the debt is the amount covered by the vehicle’s value: $10,000. The remaining $5,000 is the unsecured part of the debt. Essentially cramdown allows you and your bankruptcy lawyer re-write the loan at a balance of $10,000. It will likely be at a lower interest rate. You may well be able to stretch the payments out over a longer term. The effect will often be a significant lower monthly payment and total amount you pay. Then at the end of your successful Chapter 13 case you own your vehicle free and clear.

The Timing Qualification

So you’re filing a Chapter 13 case, with a personal vehicle loan with a balance higher than the vehicle value. Now you must meet one more timing consideration. Your vehicle loan must be more than 910 days old when you file your Chapter 13 case. (910 days is essentially two and a half years.)

What happens if you file your Chapter 13 case at any time before your loan is 910 days old? You can’t do a cramdown on that vehicle loan. You’re stuck with the regular payments, interest rate, and full balance to pay. You may not be able to afford to keep your vehicle. In any event you’ll miss out on saving lots of money on the debt. So you definitely want to qualify for cramdown if and when you can.

What if your vehicle loan is not yet two and a half years old? What if you h

ave other pressures to file your case before enough time has passed? This is where the knowledge and experience of your bankruptcy lawyer comes in. He or she will determine whether cramdown would help you and, if so, calculate how much it would help. You will receive counsel about ways to possibly ease the other time pressures. Your lawyer will help you figure out whether it’s worth waiting to file in order to qualify. And if so will help you buy time to get there. In other words, you’ll get specific advice on the best course of action for you.