Modern society necessitates the ownership and maintenance of an automobile, which can become a devastating financial burden. Lenders are fast to finance vehicles because they are aware that borrowers place a high priority on automobile transportation over other financial obligations. To compensate aggressive lenders for the additional risk, even applicants with poor credit are offered automobile financing packages with high interest rates.
Automobile financing frequently causes financial hardship. The satisfied car purchaser drives off the property in a nearly fully-financed vehicle. According to a proverb, the value of a brand-new vehicle depreciates by several thousand dollars before it even touches the road.
Including auto loan payments, liability and collision insurance, repairs, maintenance, and petroleum, the annual cost of automobile transportation ranges from $4,000 to $6,000.
When an unexpected car repair that is not covered by warranty or a motor vehicle accident unexpectedly and significantly reduces the vehicle's value below the outstanding loan balance owed to the bank, havoc ensues. Or, perhaps more benignly, on a trade-in for a new vehicle where eager car salespeople and lenders agree to take in your old vehicle on trade, and throw the remaining outstanding balance from your old car loan (for a slightly higher payment) on the back-end of your new auto loan, leaving the new car purchaser significantly ""upside-down"" on the new vehicle purchase.
These circumstances place the borrower in a predicament where substantial portions of his or her income are devoted to repaying an unsecured auto debt obligation, leaving little left over to cover the modest costs of family living.
Filing for bankruptcy can provide relief from these debilitating financial situations under certain conditions.
Chapter 13 Cram Provisions Down
Under Chapter 13 of the United States Bankruptcy Code, Debtors may 'Cram Down' the unsecured portion of their auto loans to the vehicle's fair market value. This requires debtors to repay only the secured portion of the auto loan, while the unsecured balance is treated as a general unsecured creditor, granting substantial benefits to the Debtor and allowing the Debtor to pay only a small portion of the unsecured portion of the auto loan debt that is owed.
As an illustration, suppose our debtor possesses a $10,000.00 automobile and has a $20,000.00 auto loan payoff balance. In this scenario, only a portion of the loan is secured. The auto lender is only secured to the extent of the vehicle's value or $10,000. The remaining loan balance of $10,000.00 is unsecured. In this circumstance, the Bankruptcy Code grants the Debtor the right to sever the unsecured portion of the auto loan and consider it as unsecured. Consequently, if General Unsecured Creditors received only a 20% dividend, the auto lender would only receive $2,000 on the unsecured portion of the auto loan.
These situations become thorny between Debtor and Lender due to the frequent occurrence of disagreements regarding the correct vehicle value. Prior to the confirmation of the Chapter 13 plan, your bankruptcy attorney will have to negotiate a settlement over the valuation.
The United States Bankruptcy Code, specifically 11 U.S. Code 506 - Determination of Secured Status, governs the valuation process.
11 USC 506(a)(2) expressly provides:
""""If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the filing date of the petition, without deduction for sale or marketing costs. Regarding property acquired for personal, family, or domestic purposes, replacement value shall be defined as the price a retail merchant would charge for property of that kind, taking into account the age and condition of the property at the time value is determined""""
The Cram Down provision of the bankruptcy code also allows for the reduction of the auto loan's interest rate. Frequently, debtors incur astronomical auto payments to cover the exorbitant interest rates auto lenders charge to high-risk borrowers.
An interesting exception was established by the 2005 Amendments to the United States Bankruptcy Code prohibiting cram downs when the purchase money auto loan was originated within 910 days (2 12 years) of the Chapter 13 bankruptcy petition date [see 11 U.S.C. 1325(a)(9)]. Debtors must consider the timing of a Chapter 13 petition if they wish to eliminate a burdensome auto loan debt. Auto loans taken out within two and a half years of the bankruptcy petition must be repaid as agreed.
Section 7 REDEMPTION
In Chapter 7 (also known as ""straight bankruptcy""), cram downs are not permitted. 11 U.S.C. 722 permits Chapter 7 debtors to'redeem' their personal property.
11 U.S.C. 722 stipulates the following:
""""An individual debtor may redeem tangible personal property intended primarily for personal, family, or household use from a lien securing a dischargeable consumer debt, if such property is exempt under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the holder's allowed secured claim that is secured by such lien in full at the time of redemption.""""
However, redemption can be difficult under Chapter 7 because debtors must pay in full and in advance a lump sum of cash sufficient to pay the secured portion of the auto loan based on the vehicle's fair market value at the time the debtor pursues redemption. Chapter 7 does not allow for the loan to be restructured, but sometimes the auto lender will accept payments over time, though typically for a brief period.
CONCLUSION
If your vehicle is worth less than what you owe on it, you may be able to keep your vehicle and improve your financial health by filing for bankruptcy.
Chapter 13 can ""cram down"" your loan balance and interest rates, reducing your auto payment and making it affordable. Chapter 13 also allows you to restructure past-due auto payments and spread them out over the Chapter 13 plan's duration, allowing you to catch up on the past-due payments within your means.
The 722 redemption provisions enable debtors to purchase their vehicles out of bankruptcy for the fair market value of the vehicle, leaving the unsecured portion of the debt discharged under Chapter 7 bankruptcy.
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