Bankruptcy is a last resort for most people, but it can help save one's property and provide a fresh financial start. A Chapter 13 bankruptcy may allow debtors to keep their home and other property through a repayment plan. A Chapter 13 bankruptcy can also save the debtor a significant amount of money, through what is known as a "cram down" on automobile loans. This can include extending the payoff dates on automobile loans and reducing the principal balance, sometimes significantly.
Auto loans are placed on the secured side of the ledger by default when a Chapter 13 bankruptcy is filed. Creditors are then notified that the borrower has filed for bankruptcy, and they in turn file a claim reporting the remaining balance the borrower owes on their loan. To pursue a cram down, the borrower can use a portion of Chapter 13 bankruptcy code which allows them to counter the claim and request a reduction based on the car's current value.
A cram down amount can be based on what the bankruptcy court believes the borrower is capable of contributing as well as current market value for the automobile, not the amount of the original loan. This way the borrower only has to pay current market value instead of the balance on the loan, and they only pay interest on the current market value. Once the cram down amount is satisfied, the creditor will release the loan and the previous debt owed is gone, transferring the title over to the borrower. A cram down may be an option if the vehicle was purchased at least 910 days prior to the date of filing.
Cram downs are only possible through a Chapter 13 bankruptcy because of the Chapter 13's repayment component. An auto loan cram down can take place even against a creditor's wishes because it's put in place by the bankruptcy court. Oftentimes, the court will approve a cram down on a loan because the debtor would not be able to pay back the loan in their current financial situation, and the creditor benefits in receiving a partial repayment.
Cramming down is involuntary for creditors; it is up to the court to decide what to do with liens based upon how it will help the parties involved. It is sometimes apparent that the party filing for bankruptcy would be able to make payments on their auto loan. It is not uncommon for the debtor to save 70-80% on their auto loan as a result of a cram down.
A cram down can be complicated, but it is a powerful tool which may save money and help maintain property. Like most legal matters in bankruptcy filing, cram downs are best handled by an experienced attorney. Our office can help you with all of your bankruptcy proceedings, including auto loan cram downs, to ensure that you walk away from your bankruptcy with the best possible outcome.
