Bad car loans can be financially devastating. As New Jersey Bankruptcy attorneys we often meet with people who have very high car loan payments and want to know if a bankruptcy can help to lower car payments. The quick answer is yes, but there are conditions that must be met.
If your car is worth less than the amount you owe on your loan, or if there is a very high interest rate, you may be able to lower your payments, or cramdown your payments, in a New Jersey Chapter 13 Bankruptcy. This blog post will explain what a cramdown is and how it works to decrease your car payment.
What is a Chapter 13 Cramdown of a Car Loan?
A cramdown of your car loan in a New Jersey Chapter 13 bankruptcy reduces the loan balance to your vehicle’s fair market value. You would then pay the new, lower payment in 36 to 60 months through your Chapter 13 Plan.
In certain situations, a cramdown of a car loan can significantly lower your monthly car payments. When you complete your Chapter 13 bankruptcy plan, the remainder of the auto loan balance becomes an unsecured debt like credit cards and medical bills. Since many Chapter 13 debtors end up only paying a very small amount of their unsecured debt, cramming down the car loan balance can save you thousands of dollars by lowering your monthly car payments.
The concept for vehicle cramdown is found in Section 506(a) of the Bankruptcy Code. A cramdown of a car loan is a major benefit that is available in Chapter 13 bankruptcy plans that is not available in a Chapter 7 bankruptcy.
What are the Criteria to Cramdown a Car Loan?
You must meet the following criteria to cramdown your car loan in a Chapter 13 Bankruptcy:
1. Timing Restrictions
You can only cramdown your car loan if you bought and financed your car more than 910 days (about 2 ½ years) before filing your Chapter 13 bankruptcy.
This restriction prevents people from purchasing a car and immediately filing a Chapter 13 bankruptcy to cramdown the car loan and reduce car payments.
2. Car Value
To cramdown your loan, your car must be worth less than the balance on your car loan based on a current retail market valuation. In other words you owe more on the loan than the car is worth.
The more your loan is upside down, the more a cramdown will help you. An experienced NJ bankruptcy attorney will know how to get a valuation of your car that will be acceptable to the Bankruptcy Court. While a creditor has the opportunity to object to the value you suggest, courts will generally accept the average Kelley Bluebook or NADA Value.
Example of a Cramdown of a Loan Balance
A cramdown can be confusing to understand so here’s an example:
Jamie has a car worth $10,000, but the balance on their car loan is $21,000. In a Chapter 13 bankruptcy Jamie can cramdown the loan balance to $10,000. The remaining car payments would be based upon the new lower balance, which will be paid through the Chapter 13 Plan, resulting in lower monthly auto loan payments. The remaining $11,000 ($21,000 loan – $10,000 value) becomes an unsecured debt which will likely be paid just pennies on the dollar and will be discharged (eliminated) at the end of Jamie’s Chapter 13 Plan. Jamie will then own the car free and clear at the end of the bankruptcy.
Cramming Down the Interest Rate on a Car Loan
In certain circumstances, when the interest rate on the auto loan is excessive, the bankruptcy code also allows debtors to cramdown the interest rate on a vehicle loan. If you are paying a high interest rate a decrease of a few points can make a big difference. In essence, you can lower the interest rate you owe on your car.
Often, when the criteria to cramdown an auto loan are not met, we can still cramdown a high interest rate loan to a lower, more reasonable monthly payment. This will lower the monthly payments and the total amount you will have to pay on the loan.
Example of an Interest Rate Cramdown
Jamie owes $15,000 at an interest rate of 12% on an auto loan. Their monthly payment for the remaining 36 months of the loan is $263.00. By lowering the interest rate to 5.5% the car payment can be reduced to $191.00 per month over the next 5 years.
Will the Cramdown be Permanent?
For the cramdown to be permanent you must complete your Chapter 13 Bankruptcy Plan, which depending on your situation lasts from 36 to 60 months. If you do not complete your Chapter 13 plan, the original interest and balance will be restored.
Can I Cramdown If There is a Non-Filing Co-Debtor?
If you have a co-debtor on your car loan who is not filing for bankruptcy with you, it is generally not feasible to cramdown a car loan. This situation often occurs if both spouses are on the car loan, but only one spouse files the Chapter 13 Bankruptcy. When this occurs the creditor might object to the cramdown, or seek monies owed on the car from the non-filing spouse when the bankruptcy is over.
Contact Levitt & Slafkes to Discuss Lowering Your Car Payments
The lawyers at Levitt & Slafkes, P.C. have successfully crammed down many car loans through NJ bankruptcy. Contact us today so one of our attorneys can evaluate your case and discuss the best options available to you. We are here to help!
We are proudly designated as a debt relief agency by an Act of Congress. We have proudly assisted consumers in filing for Bankruptcy Relief for over 30 years. The information on this website and blogs is for general information purposes only. Nothing should be taken as legal advice for any individual case or situation.