What Are Auto Loan Cramdowns in Chapter 13 Bankruptcy?

If you're considering bankruptcy, being able to keep your car might be one of your greatest concerns. When you read about how cars and car loans are treated in bankruptcy, you may come across the term "cramdown" in connection with auto loans. An auto loan cramdown is a tool that may be available in a Chapter 13 bankruptcy, if your circumstances meet certain requirements. If you qualify, a cramdown enables you to keep your car.

What Is an Auto Loan Cramdown?

Cramdown actually is not a term used in the Bankruptcy Code. It is an informal term used by bankruptcy judges, lawyers, and others, in connection with Chapter 13 bankruptcy. It applies to specific secured debts, including auto loans. A cramdown has benefits, including the fact that you can keep your car.

If an auto loan cramdown as approved as part of a Chapter 13 repayment plan, your loan amount is reduced to the fair market value of your car, often at a lower interest rate. That reduces the amount of your loan, the total amount you will have to pay, and your payments. If you fall behind in payments, you are protected from repossession.

Auto Loan Cramdown Eligibility Requirements

A cramdown for your auto loan is only available in Chapter 13 bankruptcy. It is also only available in certain circumstances. For your loan to qualify, both of the following must be true:

  • Your car is worth less than the amount of your loan, and
  • You purchased your car more than 910 days (2-1/2 years) before filing the bankruptcy petition.

The time limitation is imposed to prevent debtors from purchasing a car shortly before filing bankruptcy and taking advantage of a cramdown to avoid paying the full loan.

How Does an Auto Loan Cramdown Work?

If a cramdown is included in your Chapter 13 plan, your auto loan amount is reduced to the fair value of your car, which is the secured value of the loan. The balance of the loan, the unsecured amount, is rolled into your total unsecured debts for purposes of your payment plan.

Usually, the interest on your auto loan will be reduced as part of the cramdown. With the amount of the loan and interest both reduced, your monthly loan payments usually are considerably less than before your bankruptcy.

Here's an example: You purchased your car three years ago, taking out a car loan for $15,000. Today, the car's fair market value is $8,000. You can cram down your loan to $8,000, probably at a lower interest rate (and lower monthly payments). The $7,000 balance of the loan becomes part of your unsecured debt that is paid off with your Chapter 13 plan payments.

Other Debts that Can Be Crammed Down in Chapter 13

Cramdowns are not limited to auto loans. If you file Chapter 13 bankruptcy, you may be able to cramdown secured loans on investment property mortgages and on personal property like furnishings and other household goods. Your home mortgage cannot be crammed down in Chapter 13.

Alternatives to an Auto Loan Cramdown

Cramdowns are only available in Chapter 13 bankruptcy. If your circumstances aren't suitable for filing Chapter 13, you may end up filing for Chapter 7 bankruptcy. Auto loans are treated differently in Chapter 7.

In Chapter 7 bankruptcy, you may be able to keep your vehicle by either reaffirming your car loan or redeeming it. In a reaffirmation, you agree to continuing to pay the full amount of your car loan. The debt is excluded from the discharge, and your lender retains all of its rights under the loan agreement.

If you reaffirm a car loan and are unable to make the payments, your car can be repossessed. The lender can also proceed against you for any deficiency left after your car is sold, if it isn't sold for enough to pay off the whole debt. In most Chapter 7 situations, reaffirmation is the only option for keeping your car.

Redemption is also an option in Chapter 7. However, to redeem your auto loan, you need to be able to pay the lender the full current fair market value of your car (assuming that value is less than the amount of the loan). The difficulty for the debtor usually is getting the money to redeem the loan. Sometimes, debtors are able to borrow the necessary funds from friends or relatives. There are commercial sources that offer special loans for this purpose, but applicants must meet certain qualifications.

Should You Try to Get an Auto Loan Cramdown?

If you need to keep your car for employment or for other reasons, the Chapter 13 cramdown process often presents the best option, if you qualify for it. However, there are many other considerations that go into determining whether Chapter 13 bankruptcy is the best option for you.

Your income and your assets are both significant factors in determining which type of bankruptcy is best for your circumstances. Your home mortgage and equity in your home — and whether you want to try to keep your home — should also factor into your decision.

The best way to determine whether bankruptcy is right for you and what type of bankruptcy is most suitable for your circumstances is to discuss your whole situation with an experienced bankruptcy attorney. A knowledgeable attorney will talk with you in detail about your circumstances, explain the available options for filing for bankruptcy, and also ensure that you understand all the consequences of filing the different types of bankruptcy.

If you are considering bankruptcy, additional information is available on our general page about bankruptcy, as well as on our pages for Chapter 7 and Chapter 13 bankruptcy. We provide a free initial consultation for bankruptcy clients.

Talk With an Experienced Illinois Bankruptcy Attorney

Modestas Law Offices assists clients with Chapter 7 or Chapter 13 bankruptcy cases. We serve Illinois clients in Chicago, Cook County, DuPage County, and Will County. To accommodate clients who are busy during weekdays, we are available to meet in the evening and on weekends. Contact us to schedule your initial free consultation. We look forward to assisting you.

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