It’s a sad fact of life but your car will devalue more quickly than any other asset in your possession. There’s a commonly held belief that you lose 10% of your car’s value the split second you leave the showroom, which puts forward a strong case for only ever investing in a high-quality, used automobile. But what we want to touch on today is the topic of car loan “cramdowns”, and how you can leverage this process during a bankruptcy filing to potentially save yourself tens of thousands of dollars in car repayments.
Let’s say that you purchased a car for $40,000 several years ago. The current market value of that car would be roughly 50%, or less, of the original price. So, you now own a car worth in the region of $15,000, but you still owe $25,000 on your car repayment loan. This leaves you in a position where if you’re forced to declare bankruptcy it’s a financial impossibility for your creditor to recoup their losses by selling your car, meaning you have to pay down the rest of the loan as part of your bankruptcy filing.
A car loan cramdown might allow you to reduce the value of your outstanding car loan to the same value as the car itself, effectively writing off the additional debt.
Getting A Cramdown
This debt reduction process is only available as part of a Chapter 13 bankruptcy filing. The reason for this is that under a Chapter 13 you negotiate a repayment plan with your creditors over a period of 3 to 5 years. In a Chapter 7 filing you’re applying to have the majority of your unsecured debts discharged, meaning a cramdown wouldn’t make sense in that situation.
Limitations
Obviously being able to dramatically reduce the amount of money due on a car loan is going to be open to abuse by a number of dishonest individuals who would simply buy a brand-new car, and then immediately seek a cramdown on their car loan. For you to avail of a cramdown you must have owned your car for at least 2.5 years (910 days) before attempting to include a cramdown as part of your bankruptcy filing.
Loan Balance
Once a cramdown is successful you’re probably wondering how much you would have to repay on the loan itself. Under a Chapter 13 filing most of your unsecured creditors will get back cents on the dollar for the debt you owe as part of the repayment plan, so you can expect the balance of your car loan to behave in the same way. Once your repayment plan is complete you will retain 100% ownership of your car, with nothing due to the car loan provider at all.
Another perk of a cram down is that it can extend the length of time you have to repay your car loan, reducing your monthly expenses as a result. For example, if you only had 2 years of payments left to make on your car and you filed for Chapter 13 in the meantime, this then means that your new (and dramatically reduced) car loan repayments would be extended to between 3 and 5 years instead.
Considering that a car loan cramdown is only available to individuals filing for Chapter 13 bankruptcy we would recommend that you seek professional legal advice on this debt reduction practice.