If you have come to the conclusion that a bankruptcy filing is the best way for you to get your finances under control, but you really need your vehicle to be able to work after the bankruptcy, you may want to consider what’s known as a “cramdown,” a procedure whereby you can keep your car, but significantly lower the amount you owe on it.
The bankruptcy laws allow cramdowns because of the distinction between secured and unsecured debt. Under bankruptcy laws, you typically cannot discharge secured debt—debt that is backed up by a lien on property—and still keep the property. Unsecured debt, though, can generally be discharged. When you have a car loan, it’s only the fair market value of the vehicle that’s secured by the lien. Anything you owe above that is unsecured debt and can be discharged.
There are specific criteria you must meet, though, to successfully go through the process:
- You must owe more on your car than it is worth—This is known as being “under water” on your car loan. You will only be eligible for a cramdown if you are under water. Technically, the purpose of a cramdown is to reduce the principal balance on your auto loan to the fair market value. As part of the process, though, you may be able to negotiate a new, lower, interest rate, or extend the term of the loan, thereby lowering your monthly payments.
- Cramdowns may only be done in Chapter 13 proceedings—You can only cramdown a car loan in Chapter 13. You can’t exempt your car from the bankruptcy sale in a Chapter 7 petition and simultaneously obtain a cramdown.
- Cramdowns are generally not available for recent vehicle loans—Under the law, a vehicle loan may only eligible for cramdown if it was signed more than 910 days before your bankruptcy filing—about two and a half years.
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