One of the first questions a prospective client will as a bankruptcy attorney is, “Can I keep my car?” Reliable transportation to work, school, or to the grocery store is critical to financial recovery for most Americans.
Fortunately, bankruptcy offers several options for keeping a vehicle used for personal use. One of the most beneficial options is the Chapter 13 cram-down.
Vehicle cram-down in a Chapter 13
Vehicle cram-down in a Chapter 13 bankruptcy is the process of reducing the amount or terms of a loan over the objection of the secured creditor.
The debtor may seek to alter the principal amount owed, the interest rate, and/or the repayment term.
Most vehicle cram-down motions seek to reduce the outstanding debt on an upside-down vehicle loan to the fair market value of the vehicle.
The debtor only pays what the vehicle is worth, not what is owed. The debtor may also ask to reduce a high interest rate, or change the number of months for repayment.
The new terms of the crammed-down vehicle debt must be paid during the bankruptcy.
What about the outstanding principal or interest rate?
When the outstanding principal or interest rate is changed by a cram-down, the loan is divided into two parts: secured and unsecured.
The secured debt is paid by the debtor and the unsecured portion is paid at the same rate as general unsecured creditors. Any remaining unsecured debt is discharged upon completion of the Chapter 13 bankruptcy.
Here’s an example
To illustrate the mechanics of a Chapter 13 cram-down, suppose the debtor has a vehicle financed through Seedy Ally Finance Company, LLC. The debtor owes $10,008 to Seedy Ally and pays at a rate of 10% each month. There are 40 payments left on the loan and the monthly payment is $277.89.
The debtor may seek to cram-down this loan to the fair market value of the vehicle, say $5,000. The debtor may also ask the court to reduce the interest rate, to say 5.5%. The debtor may also propose to repay the debt over 36 months.
The new payment on the vehicle debt is $150.98 per month and is paid over the course of the Chapter 13 repayment period.
The remaining $5,008 unsecured vehicle debt is treated in the same way as other general unsecured creditors in the Chapter 13 plan.
Are there any restrictions?
There are some restrictions on vehicle cram-down during a Chapter 13 bankruptcy. The basic rules of a cram-down are pretty straightforward:
- A vehicle cram-down is only available in a Chapter 13 case (different options exist in other bankruptcy chapters);
- The vehicle must be for personal use;
- The debt must have been incurred more than 910 days (about 2 ½ years) before filing the bankruptcy petition ; and
- The loan must be more than the fair market value of the vehicle.
If the vehicle purchase was within 910 days of the bankruptcy filing, the Bankruptcy Code requires that the debtor pay the entire value of the loan, usually within the three to five year payment period of bankruptcy case.
However, the interest rate and payment time may still be adjusted to a court-ordered interest rate, called the “Till rate” so named after the U.S. Supreme Court case, Till v. SCS Credit Corp., 541 U.S. 465 (2004).
The Till rate is adjusted twice a year by the bankruptcy court, and has recently been around 5%. The Till rate is often less than the debtor’s original interest rate, and lowers the monthly payment.
Vehicle debt for many Chapter 13 debtors is paid at the Till rate over the course of the bankruptcy case.
How is a cram-down accomplished?
A cram-down is accomplished through a court order and confirmed Chapter 13 bankruptcy plan. The bankruptcy court will receive evidence of the amount owed and the value of the vehicle.
Once the court approves the cram-down, the amount of the secured claim will be the same as the value of the vehicle.
The remaining balance will be ordered as unsecured, and is discharged at the end of the bankruptcy case.
How are car payments made?
Payments to the creditor on a cram-down are made through the bankruptcy trustee’s office and included in the debtor’s monthly Chapter 13 payment.
If the debtor either dismisses or converts the Chapter 13 case, the original terms of the vehicle debt are reinstated.
While the federal bankruptcy laws are meant to be uniform across the country, the sweeping changes to the Bankruptcy Code in 2005 left many questions that are still being resolved by different circuits.
For instance, the Ninth Circuit in the case of In re: Penrod broke from the rest of the country and decided that the amount of negative equity in a trade-in that was rolled into a new vehicle loan could be stripped off, even when the loan is less than 910 days old.
This case highlights the different interpretations of the new bankruptcy laws and why it is critical to retain experienced counsel for any bankruptcy case.