Growing Up, Calming Down and Working For the Cramdown

Last week, I focused primarily on some options available to debtors in Chapter 7 bankruptcy with regards to car loans. While many of my clients would prefer the shorter process involved in filing Chapter 7, not everybody qualifies and, thus, many people have to file Chapter 13 instead. While a Chapter 13 process certainly takes much longer than a Chapter 7, it is important to understand that a Chapter 13 bankruptcy also offers some attractive options for consumers.

Since I talked about various car loan options in a Chapter 7 last week, today I wanted to discuss an option not available in Chapter 7, cramming down a car loan. A “cramdown” is the term for the reduction of a debt to a lower amount. Because vehicles begin to depreciate as soon as the buyer drives the car off the lot, it is not uncommon for many people filing Chapter 13 to owe more on a vehicle than it is actually worth. Thus, in a Chapter 13, a car loan cramdown involves proposing that a car lender receive only what the car is worth rather than the entire balance of the loan.

Debtors using a car loan cramdown in Chapter 13 can not only have the interest rate on the loan lowered (often lower than the original rate), but those who successfully complete their Chapter 13 repayment plans will also have the original car loan’s unpaid balance discharged. However, there are some requirements for a cramdown.

The Bankruptcy Code requires that a car must have been purchased at least 910 days (or around 2 ½ years) before filing bankruptcy, and also limits the use of cramdowns in cases involving Purchase Money Security Interests (PMSI), where a lender provides financing for property and then takes back a security interest in the collateral, which often applies to auto loans. This prevents people from purchasing new cars and then immediately cramming down those loans.

The art of a cramdown is not limited solely to vehicles, and on Wednesday, I’ll talk about another way in which debtors can utilize this process.

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