Chapter 13 Auto Cramdowns vs Chapter 7 Car Redemptions
The problem of negative equity in an auto
Debtors often have problems with their cars in a bankruptcy. You have negative equity if you owe more than the auto is worth. If you have negative equity in your auto you are often able to cramdown your car in a Chapter 13 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 if the debt is over 910 days old. You can also do a cramdown if the loan has been refinanced or if the loan is a business loan.. Cramming down a car can only be done in a Chapter 13. A Chapter 13 often also reduces the interest rate to about 1% over what banks pay for their money.
In a Chapter 7 the similar process is called a redemption where you pay the retail value of the auto and bankrupt the rest of the loan as an unsecured debt. Essentially you are buying the auto for what the retail value is and they release the lien. You can only “cramdown” or “redeem” personal property. Redeeming modifying or cramming down a first residential mortgages is not possible in a Chapter 7 or 13. You can however value and strip commercial mortgages, vacation home mortgages or a second mortgage that has no equity in a chapter 13.
Surrendering Reaffirming and Ride Through:
You have to make a choice when you file a Chapter 7 or 13 with a secured creditor.
- If the car is horrible you can surrender it and owe nothing. Creditors may not even pickup the vehicle or they may wait until the end of the case. They can pay a filing fee of about $300 and an attorney fee of about $750 and file a motion to terminate the stay to pick it up immediately. They normally are better off waiting until after the case. If the auto is junk and they don’t pick it up you can file an affidavit of incomplete transfer to insure it gets out of your name and you don’t pay taxes on it.
- If you reaffirm the on time payments are reported to the credit bureau. However you must be able to afford the loan to get court approval of a reaffirmation agreement. You go back to being liable for the debt. If you plan to refinance your home later you must reaffirm.
- Ride Through. If you cant reaffirm because on paper you cant afford the auto you can simply make the payments and keep the auto. However your payments may not be reported unless you reaffirm.
- The final choice is to redeem the auto if you have a lot of negative equity
Redemptions in a Chapter 7
A redemption purchases the auto for the retail value of the auto. Normally this is done 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 over 30-60 days. A chapter 7 only lasts 3-4 months. A redemption can be forced on a creditor. A reaffirmation is an agreement with a creditor and voluntary.
722 redemption is a company which will finance an auto purchase from the lender. You may be able to negotiate a price lower than retail with some lenders. You can also purchase a different vehicle from Budget, Toyota of Louisville or 722 while you are in a Chapter 7 or 13. Financing a redemption is often at a high interest rate 21%. Financing a new purchase during a Chapter 7 runs about 15%. Purchasing an auto 6 months to a year after discharge currently runs about 6-9% after you credit hits about 620. Currently the interest rate for a person with a 650 is about 6%. But often a high interest rate is far cheaper than paying the full amount owed if you have negative equity. .
How to qualify for a Chapter 13 Cramdown
A cramdown separates the debt into 2 parts. The secured portion of the debt is for what the car is worth. This must be repaid in full. The unsecured portion is repaid with the other unsecured claims. 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. A Chapter 13 tends to work like a debt consolidation loan where priority and secured debts are paid first. Unsecured creditors may be paid 100%, 70%, 10% or less at the end of the plan. Each level of repayment has benefits and costs.
To Cram down a car in a Chapter 13:
- The loan only has to 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 dealer. 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.
- 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.
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. 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.
Summary Chapter 13 Auto Cramdowns vs Chapter 7 Car Redemptions
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. Chapter 13 Auto Cramdowns vs Chapter 7 Car Redemptions