Chapter 13 Auto Cramdowns vs Chapter 7 Car Redemptions
Debtors often have problems with their cars in a bankruptcy. They often have older cars that won’t last 5 years and it may be best for them to buy or finance a car just before filing a Chapter 13 or 7. After they file a Chapter 13 bankruptcy you must get court approval of a car loan. This is something that isn’t easy and often takes about 30 days. We do have dealers in the area such as 722 redemption, Toyota of Louisville and Budget that are experienced in getting you a reasonable price and interest rate while you are in a Chapter 13.
But if you owe more than the auto is worth and have negative equity in your auto you often are able to cramdown your car to make it more affordable. Essentially you pay back what the car is worth in a Chapter 13 and bankrupt the balance of the car loan as an unsecured debt. Cramming down a car can only be done in a Chapter 13.
In a Chapter 7 the same process is called a redemption where you pay the retail value of the auto and bankrupt the rest of the loan. Essentially you are buying the auto for what the retail value is not what is owed on it. You can “cramdown” or “redeem” personal property in a Chapter 13 or 7. You can’t “cramdown” or “redeem” a primary residential mortgage. You can however “Cramdown commercial mortgages, vacation mortgages or strip a second mortgage that has no equity in a chapter 13.
If you don’t redeem your car in a Chapter 7 you should be able to do one of the following alternatives:
- Surrender it and owe nothing.
- Reaffirm and have your on time payments reported to the credit bureau. However you must be able to afford the loan to get court approval of a reaffirmation and you go back to being liable for the debt. or
- Ride Through and simply make the payments and keep the auto however your payments may not be reported unless you reaffirm.
How to qualify for a Chapter 13 Cramdown
A Chapter 13 tends to work like a debt consolidation loan where priority and secured debts are paid first. Unsecured creditors may be paid 10% or less. If a Chapter 13 and cramdown is right for you then the unsecured part of the loan is repaid with the other unsecured claims. Essentially a cram down makes your car loan into two parts one part secured one part unsecured. If you complete the plan you save on what you would have paid for the car. But you must complete the plan to get the bargain of the cramdown. A more complete explanation of stripping judgment liens tax liens and second mortgages in Chapter 13 is here.
To Cram down a car in a Chapter 13:
- The loan must be over 910 days old if the loan was made to purchase a consumer vehicle. If the car was refinanced or the vehicle is a commercial vehicle there is no waiting period. Only loans for the purchase of a personal vehicle have to wait two and a half years ( 910 days) before they can be crammed down.
- The cramdown does have to pay the lender the retail value of the vehicle. If the car is in poor condition you may be better off letting it go back and buying a different car. This is where if the bank is greedy and insists on the retail value for a car in poor condition you are better off just getting another one from a local dealers. Some finance companies may allow less than retail but most credit unions don’t.
- The repayment of the auto must be included in your plan which may require catching up any arrearage or adequate protection payments. Adequate protection is just an accelerated repayment to the car lender to insure the car does not depreciate faster than it is being paid for in the plan. This normally only means the attorney and unsecured creditors are paid back a little slower through the plan. In a cram down the part of the loan that is secured is an amount equal to the retail value of the car.
You must complete the plan and obtain the discharge before the lien on the car is released. If you don’t complete the plan you return to owing more that the auto is worth and you have often fallen further behind if the plan fails. In a Chapter 7 a redemption works very similarly but the payment must be in a lump sum purchase of the auto.
You can also often reduce the interest rate on the auto. We have gotten the interest rate down to 5% 3% and in one case where the lender failed to object we got it down to 0%. Normally it is lowered to the prime rate plus 1 percent.
Redemptions in a Chapter 7
A redemption purchases the auto for the retail value of the auto normally in a single payment. The statute requires a single payment but a creditor can agree or may fail to object to it being paid back in 2-3 payments. A chapter 13 only lasts 3-4 months and if repayment takes longer a change in the amount paid or payment amount is done with a reaffirmation agreement. A redemption can be forced on a creditor. A reaffirmation is an agreement with a creditor and voluntary. A more complete explanation about reafrfirmations and redemptions in a Chapter 7 is here.
722 redemption is a company which will finance the auto purchase from the lender. You may be able to negotiate a price lower than retail with some lenders. You may want to purchase a different vehicle in other cases. Financing a redemption is often at a high interest rate. But often the high interest rate is far cheaper than paying the full amount owed.
If you owe more than your car or home is worth and want to reduce what you owe be sure to talk with your attorney about what you can do in a bankruptcy about it. Our website and manual is designed to help deserving people who need help. Your feedback is important. Be sure to share the materials on Facebook etc and leave us a nice review if we did a good job and let us know if there is something we can do better.
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