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Archive for the ‘vehicle cram down’ tag

Keep Your Vehicle through Cramdown

May 13th, 2019 at 7:00 am

If you can’t afford to pay your vehicle payments even after writing off your other debts under Chapter 7, consider a Chapter 13 loan cramdown. 

 

The last two blog posts have been about keeping your vehicle in a Chapter 7 case. Two weeks ago was about the benefits of reaffirming the vehicle’s loan. Last week was about possible ways of keeping the vehicle by making the loan payments but not reaffirming. These all assumed that you would keep on making the full monthly payments in order to keep the vehicle.

But what if you can’t afford the full monthly payments? Are there any other options if, even after getting rid of your other debt, you can’t pay the vehicle payments?

The answer: you may be able to reduce the vehicle payments through Chapter 13 cramdown. In fact, you may be able to significantly reduce the payments. And cramdown may give you some other huge financial benefits.

Reducing Monthly Payments through Cramdown

Chapter 13 “adjustment of debts” is very different from Chapter 7 “straight bankruptcy.” It takes much longer but Chapter 13 comes with some significant advantages. This includes the possible cramdown of your vehicle loan.

Under Chapter 13 you and your bankruptcy lawyer come up with a court-approved payment plan. That plan just about always significantly reduces what you pay monthly towards your debts. And if you successfully complete the plan you usually pay significantly less overall towards your debts.

Similarly, under cramdown you can often reduce both your monthly payment and the total you pay on your vehicle loan.

How Does Cramdown Work?

Your Chapter 13 payment plan treats secured debts and unsecured debts very differently. In general, secured debts need to be paid in full if you want to keep whatever the debt is securing. Unsecured debts usually only need to be paid as much as there’s money available to pay them.

So what if a secured debt—such as a vehicle loan—is only partially secured? That happens if the vehicle is worth less than the balance owed on the loan. The secured part of the loan is the amount equal to the value of the vehicle. The unsecured part is the rest of the loan balance—the part that effectively has nothing securing it.

Here’s a simple example. Let’s say you’d been paying for 3 years on a vehicle loan, you now still owe $15,000 but the vehicle is worth only $9,000. The secured portion of that vehicle loan is $9,000 and the unsecured portion is $6,000.

Recalculating the Payment Amount

Cramdown re-writes your vehicle loan so that your monthly payment gets calculated on only the secured part of the loan. In our example, your monthly payment now pays down only the $9,000 secured debt instead of the full $15,000 balance. Since the secured amount is less than the full loan balance, the new monthly payments are usually less.

The monthly payment is also reduced when those payments are stretched out over a longer period. They can extend as long as your Chapter 13 payment plan lasts, which is usually 3 to 5 years.

In addition, cramdown sometimes lowers the vehicle loan’s interest rate. That helps if your contract interest rate is high.

Combining all this, cramdown reduces your monthly payment by reducing the total amount it is paying off (the secured part of the loan), sometimes stretching the payment term out over a longer period, and often reducing the interest rate.

As a result, it’s not unusual for monthly payments to be chopped in half, or even better. It all depends on the details of your vehicle loan and on your finances going forward.  

What Happens to the Unsecured Part?

In our example, what happens under Chapter 13 cramdown to the remaining $6,000 unsecured part of the vehicle loan?

It’s lumped in with and treated just like your other “general unsecured” debts. Most of the time a Chapter 13 payment plan pays these low-priority debts only as much as you can pay them, if anything. That is, you pay “general unsecured” debts only AFTER paying the “priority” and secured debts.

There are exceptions, but this usually means you pay the unsecured part of your vehicle loan only if and to the extent you have money left over after paying other debts during the course of your payment plan. At your case’s completion any remaining amount gets “discharged,” permanently written off, along with your other “general unsecured” debts.

Qualifying for Cramdown, Other Considerations

Next week we’ll get into timing and other considerations in qualifying for a Chapter 13 vehicle loan cramdown.

 

The Surprising Benefits: Saving Your Vehicle Better through Chapter 13

September 24th, 2018 at 7:00 am

Chapter 7 is limited in how it can help with your vehicle loan. Chapter 13 can do much more—buy more time and often reduce your payments. 

 

Problems to Solve

Last week we addressed the kind of help Chapter 7 “straight bankruptcy” provides on your vehicle loan. Mostly it clears the deck of your other debts so that you can afford to keep your vehicle. Hopefully Chapter 7 accomplishes that.

But what if you can’t afford the contractual monthly payments even then? What if your vehicle isn’t worth what you owe on it? What if you’re behind on your payments or insurance and can’t catch up fast enough?

If you can’t or don’t want to keep your vehicle Chapter 7 also gives you the option of surrendering it. The benefit is that it legally write off your obligation to pay the “deficiency balance.” That’s the often surprisingly large remaining debt after a vehicle repossession or surrender. Writing off the debt is better than being saddled with it if you don’t file bankruptcy.

But what if you definitely need to keep your vehicle but can’t do so under Chapter 7? What can Chapter 13 do for you better?

Chapter 13 Buys Time—Often much More Time

If you are late on your vehicle loan payments, filing a Chapter 7 case will prevent an immediate pending repossession. But then virtually always you’ll have to catch up on any arrearage within the next month or two. That’s of course on top of keeping up on ongoing monthly payments.

Chapter 13 usually gives you much more time. Instead of giving you weeks to catch up, usually you’d have many months to do so. Exactly how much time you’d have depends on many factors. But generally you’d start paying your regular payments as they became due, and then chip away at the arrearage over the course of at least several months.

Chapter 13 “Cramdown” May Reduce Monthly Payments—Sometimes Significantly

You don’t always have to pay your regular monthly payments as they come due after filing under Chapter 13. If you qualify for “cramdown” you would likely pay less per month on the vehicle loan—possibly much less.

Cramdown is an informal term for the Chapter 13 procedure for legally re-writing the loan if your vehicle is worth less than you owe. To qualify your vehicle loan must be more than 910 days old at your Chapter 13 filing. (That’s slightly less than two and a half years.)

The loan payments are reduced because the loan is restructured based on the value of the vehicle. You pay that secured portion of the loan through monthly payments. Those payments are usually much less because they are based on the vehicle value instead of the contract balance.

Also, the payments are further reduced under Chapter 13 if the amount to be paid is to be paid out over a period longer than the time left on the contract.

Finally, if your vehicle loan has a relatively high interest rate, you can often also reduce that rate.

Each of these helps reduce the monthly payment on the loan.

You May Not Need to Catch Up on Missed Payments

If you qualify for cramdown you usually don’t have to pay any missed payments after filing a Chapter 13 case. You just pay going forward, at the reduced monthly payment.

Not having to scramble to pay missed payments is a huge benefit. You can concentrate on your most important obligations, such as the crammed down monthly payment.

Catching Up on Lapsed Vehicle Insurance

If you’d fallen behind on your vehicle insurance, that would be an extremely important obligation to focus on. You DO have to reinstate lapsed insurance quickly in order to keep your vehicle—in either Chapter 7 or 13. So the fact with cramdown you may not have to pay any missed payments or else be allowed to catch up more slowly means that you’d have more money available to reinstate your insurance.

Examples, Please

No doubt the benefits listed above sound great. It’s great to have much more time to catch up or to not need to catch up at all. It’s great to have reduced monthly payments, to pay less overall on a vehicle until it’s yours free and clear.

But these benefits would make more sense and be even more impressive if we showed how they work in practice. We’ll do that in our blog post next time.

 

The Surprising Benefits: Saving Your Vehicle Better through Chapter 13

Reaffirmation Agreement vs. Chapter 13

January 3rd, 2018 at 8:00 am

When is it better to reaffirm a secured debt (such as a vehicle loan) in a Chapter 7 case vs. handling it instead in a Chapter 13 case? 

 

The last 5 blog posts in December were about keeping the collateral you want by “reaffirming” the debt. “Reaffirmation” applies only to Chapter 7 “straight bankruptcy”cases. (We’ve focused mostly on reaffirming a vehicle loan.) Today we get into keeping collateral (such as a vehicle) instead in a Chapter 13 “adjustment of debts” case. Our main question today: when is Chapter 13 a better way to keep your collateral than Chapter 7?

Rule of Thumb: Chapter 7 unless Need More Help

There are basically two questions:

  1. Would you be able to keep your collateral/vehicle in a Chapter 7 case?
  2. Even if so, would you get a significantly better result in a Chapter 13 case?

1. When You’re Able to Keep the Collateral in Chapter 7

If you are current on your debt payments, you would very likely be able to keep your collateral/vehicle under Chapter 7. You usually have to formally reaffirm the debt. That means you exclude that debt from the discharge (legal write off) that Chapter 7 provides. You continue to be fully liable on that one debt.

Creditors are usually very happy to be singled out this way. You are much better of a credit risk once you no longer owe all or most of your other debts.

Even if you are not current a Chapter 7 reaffirmation works if:

  • you are able to bring the debt current within two or so months after filing, or
  • the creditor is willing to work out the missed payments—give you more time to catch up, put the missed payments at the end of the contract, or even forgive the payments altogether

Chapter 7 also works well in those situations that a creditor is willing to lower the monthly payment and maybe even the total owed. This seldom happens with vehicle loans, except maybe if the vehicle is worth much, much less than you owe.

2. When Chapter 13 Can Give You a Better Result

Even if you CAN keep the collateral in a Chapter 7 case that doesn’t necessarily mean that you should if Chapter 13 would give you a much better result.

If you’re not current on payments, Chapter 13 would give you much more time to catch up. Consider if your creditor is making you catch up immediately before reaffirming, or within a few months after reaffirming. Let’s say you COULD catch up but it would take extraordinary effort to do so. Chapter 13 could give you many months—or maybe even a few years—to catch up. If that would greatly help you that extra time to catch up which Chapter 13 gives you could make its much longer procedure worthwhile. This may be especially true if you have other very pressing debts (child or spousal support, income taxes, etc.).

Whether or not you are current on payments, Chapter 13 can give you a much better result if your collateral is worth significantly less than you owe on it. You can do a “cramdown” when your collateral is NOT real estate but instead “personal property.” Personal property is essentially anything that isn’t real estate, including vehicles, furniture, appliances, electronics, etc.  Without going into detail here, “cramdown” allows you to re-write your loan based on how much your collateral is worth. You can usually reduce the monthly payment and the total you pay, sometimes very significantly. “Cramdown” is available only under Chapter 13, not Chapter 7.

Especially Bad Payment History

As we said earlier, it’s usually in a creditor’s best interest to allow you to reaffirm a debt whenever you are willing to do so. But in rare circumstances a creditor may refuse to allow you to reaffirm the debt and keep the collateral. This may happen if you’ve had an especially bad payment record—consistently been very late on your payments, for example. Or if you’ve failed to maintain insurance. At some point a creditor may just prefer to repossess the collateral, sell it, and to end the relationship. Talk with you bankruptcy lawyer about whether this may be an issue for you if your history sounds like this. He or she likely has experience with your creditor about such matters.

In situations when a creditor may not be willing to let you reaffirm, Chapter 13 may be worth seriously consideration. In a Chapter 13 case the creditor has much less say about whether you get to keep collateral. You and your lawyer put the secured debt into your payment plan, leaving the creditor with limited grounds for objection. It’s true that your prior history may result in some greater restrictions. For example, if you’ve let a vehicle’s insurance lapse before, you can’t let that happen during the Chapter 13 case or you may lose your vehicle.  Also you DO have to comply with the plan that you propose and the court approves. But as long as you do so you’ll be able to keep the collateral and will own it free and clear by the end of the case.

 

Reaffirming a Debt That’s Not Current

December 25th, 2017 at 8:00 am

You usually have to get current on a secured debt before you can reaffirm it. But the terms of a reaffirmation agreement may be negotiable. 

 

Two blog posts ago we introduced reaffirmation agreements, and in the last one we discussed their risks. Today we get into what happens if you are not current on a debt that you want to reaffirm.

Reaffirmation Basics

Reaffirming a debt means excluding it from the legal write-off (the “discharge”) that you get in a Chapter 7 case.

The most common reason to reaffirm a debt is to be allowed to keep the collateral securing that debt.  There are occasional other reasons. For example you might agree to reaffirm a debt because you allegedly incurred it fraudulently. So you settle the debt by agreeing to reaffirm and pay a portion. But the vast majority of reaffirmations are done to retain collateral that you want to keep.

Most of the time when you reaffirm, you agree to all the terms of your original debt agreement. For example, you agree that if you fail to make vehicle loan payments the creditor can repossess your vehicle and come after you for any remaining balance. (See our last blog post about this risk.)

The Common Obligation to Get Current First

Because you usually reaffirm all the terms of the original debt agreement, most of the time you have to be current on that original agreement when you enter into the reaffirmation agreement. Otherwise you’d be in default from the start.

Especially with vehicle loans, and particularly with the larger vehicle lenders, they allow no negotiation about this. It’s the same thing with not being able to reduce the monthly payment amount, or the total debt amount. Even if the vehicle is not worth what you owe, if you want to keep the vehicle most of the time they make you agree to pay the full amount owed.

Possibility of Negotiating Past-Due Payments

This does not mean that any of these terms are never negotiable. For example, if you owed $5,000 on a vehicle clearly not worth more than $3,000, it would sure seem to make economic sense for the lender to be willing to lower the balance to, say,$3,750, plus make some money on future interest, instead having you surrender the vehicle.  Or if you were a payment or two behind, to reaffirm for $4,000 and give you time to catch up.

In a reaffirmation the two parties could change any of the terms of the original agreement, if they both wanted to. If you were behind, you could be given time to catch up. Or the payments could be put on the end of the contract, so you could delay catching up until then.

The practical problem is the willingness of the lender. As mentioned above, the larger vehicle lenders tend to be inflexible. For reasons beyond the scope of this blog post, they’ve largely decided it’s take it or leave it. Either reaffirm all the terms of the original deal or surrender the vehicle. Talk with your bankruptcy lawyer to find out whether this is true about your lender.  

Chapter 13 As a Negotiating Threat

Be aware that the Chapter 13 “adjustment of debts” option usually gives you much more power over your vehicle lender if you’re behind on your secured debt. You almost always have many months and sometimes even years to catch up. If you qualify for “cramdown” you would likely be able to lower the monthly payments. Usually you could even reduce the total amount you pay before you get the title, sometimes significantly.

When you talk with you lawyer ask how Chapter 13 would affect your vehicle or other secured debt. Ask whether threatening to turn your case into a Chapter 13 one might encourage your lender to be more flexible. And of course give appropriate consideration to filing a Chapter 13 case instead for the benefits it would give you.

 

Reducing the Cost of Your Vehicle Loan through Cramdown

July 28th, 2017 at 7:00 am

Chapter 13 vehicle loan cramdown solves a number of serious practical problems that even Chapter 7 “straight bankruptcy” can’t.

 

Chapter 13 REALLY Helps with Vehicle Loans

If you want to keep a vehicle with a debt against it, Chapter 13 can really help.

It’s almost as if the more worse off you are with this kind of debt, the more Chapter 13 can help:

  • If you’re behind on payments, you’ll be given a long time to catch up, and may not even need to
  • If the car or truck is not worth as much as you owe, “cramdown” can lower your monthly payments, the interest rate, and reduce the total amount you pay for it
  • If you fall behind later, you’re protected from repossession

Chapter 13 also generally allows you to favor your vehicle loan above most other debts.

Today we’ll show you how this works with a hypothetical example.

The Facts

Emily got laid off and it took her a couple months to find another job, which she just started. She’s now a few days away from being 2 months late on her vehicle loan. She absolutely needs her vehicle to get to and from her new job. She has no way to get a reliable replacement vehicle.

Her first paycheck doesn’t arrive for 2 weeks, and she has to use it to pay rent, utilities, and groceries. Her car payments are $450 per month, so she’s about to be $900 behind. Emily has absolutely no savings, nothing worth selling to raise money, and no one to borrow from. She knows her car’s on the brink of being repossessed, but sees no way to catch up. She’s really scared.

She owes $13,500 on her car, which is worth only $8,000. It’s a relatively high interest loan, because her credit was not great when she bought the car. She wishes the monthly payments weren’t so large.

Emily also owes $80,000 in a combination of credit cards and medical bills, most of which are past due.

So she goes to see a bankruptcy lawyer to see if she has any sensible options.

Chapter 7’s Shortcomings Here

The lawyer tells Emily that a Chapter 7 case would very likely discharge—permanently write off—her $80,000 in other debts. But it wouldn’t provide much concrete help with the vehicle loan.

She could surrender the car to her lender, and she’d owe nothing. But she’s committed to keeping the car. To do so in a Chapter 7 case she’d have to “reaffirm” the debt—agree to remain liable on it.

The immediate problem with that is that Emily would have to catch up on the late payments. And do so pretty fast—within a month or two after filing her bankruptcy case. Even after not having to pay her other debts, she just doesn’t have the cash flow to scrape together the money that fast.

The other problem is that reaffirming the car loan would be risky for Emily. The payments are too high for her. She owes substantially more than it’s worth. If a year or two down the line she couldn’t make the payments and the car would get repossessed, she would almost for sure still owe a lot to the vehicle lender. She’d owe the balance owed at the time minus whatever the lender would sell the car for at an auto auction. So Emily would have no car but would still owe a substantial debt.

The Chapter 13 Solution

Emily’s lawyer advises her to file a Chapter 13 case instead. Because the car is worth less than its debt, she can do a “cramdown” on the loan. As a result:

  • She doesn’t have to catch up on the missed payments at all.
  • The loan is effectively rewritten based on the value of the car at the time, $8,000.
  • Her monthly payment is reduced from $450 to $295.
  • The interest rate is reduced.
  • The unsecured part of the debt—$13,500 minus the $8,000 car value, or $5,500—is lumped in with the $80,000 of credit card and medical debts, and Emily pays these “general unsecured” debts only to the extent that her budget allows. Whatever remains unpaid at the end of the Chapter 13 case is discharged, written off.

So, Chapter 13 solved all of Emily’s concerns: she avoids repossession, gets to keep her car without having to come up with the missed payments, and reduces both the monthly payments and the total paid for the vehicle before it’s hers free and clear.

 

Secured Creditors’ Proofs of Claim in Chapter 13

November 23rd, 2016 at 8:00 am

If you want secured creditors to be paid in your Chapter 13 plan, they must file proofs of claim. Let’s use the example of a vehicle loan. 

 

Secured Debts

A debt is secured if the creditor has a lien on something you own. The lien gives the creditor rights against that thing you own. That usually includes the right to repossess it if you don’t pay the debt.

Let’s focus on what’s probably the most common kind of secured debt: a vehicle loan. When you finance your purchase of a car or truck, your lender becomes its lienholder. To secure the loan the lender requires you to give it a lien on the vehicle. That lien is a “charge against or interest in [your] property to secure payment of a debt or performance of an obligation.” (Section 101(37) of the Bankruptcy Code)

Bankruptcy discharges—legally writes off—most debts, including secured debts. But that just discharges the personal liability on the debt itself. The lien—the lender’s right to repossess—is not erased by bankruptcy. If you want to keep a vehicle when you go through bankruptcy, you have to deal with the lien.  Generally, unless you’re surrendering the vehicle, the way to deal with the lien is to pay the debt owed.

(With “cramdown” you can pay less than the full debt, based on the value of the vehicle. But you still have to satisfy the lien. “Cramdown” only applies to loans at least 2 and a half years old,)

Chapter 13 Plan

Let’s say you bought a used vehicle two years ago (so no “cramdown”). Because of other financial pressures you’d recently fallen two payments behind, totaling $850. Part of the reason you filed a Chapter 13 case is to stop the vehicle from being repossessed. Keeping it is a huge priority for you. You definitely need the vehicle to commute to work and to get your kids everywhere—to keep your life together.  

Assume your Chapter 13 payment plan says that you’ll resume regular monthly payments and will catch up on the $850 through 10 monthly payments of $85. Almost for sure your lender would not allow you that much time to catch up otherwise. Chapter 13 law usually requires them to give you this amount of time. As a result you have more money to live on and maybe to pay other urgent creditors.

The Crucial Role of the “Proof of Claim”

Your Chapter 13 plan could explicitly state that your vehicle lender is going to be paid. The bankruptcy judge could formally order that the plan is approved (“confirmed”). You could pay the plan payments perfectly to the Chapter 13 trustee. But your lender still would not receive anything from the trustee without one more step. The lender must file a “proof of claim” with the bankruptcy court.

A “proof of claim” is a rather simple form on which your lender states how much you owe and usually provides some documentation showing the basis for the debt. (Section 501 of the Bankruptcy Code)

Lenders want to be paid and so would normally file proofs of claim to have that happen. But they sometimes mess up. They usually have 90 days from the date of your “meeting of creditors” to file proofs of claim. Since that “meeting” is about a month after your bankruptcy lawyer files your case, the deadline is a specified date about four months into your case.

You get a formal notice—as do your creditors—giving that exact deadline. Your lawyer should review the filed proofs of claim right after that deadline. Be in touch with the lawyer to find out if your auto lender filed an appropriate proof of claim. (At the same time you can discuss the proofs of claim filed or not filed by other important creditors.)

You have 30 days after the creditors’ deadline to file a proof of claim on behalf of any creditor that messed up and did not file one on time. Your Chapter 13 trustee has the same right. Different trustees have different practices about whether not they file proofs of claim for creditors, and if so when, so talk with your lawyer about this.

Conclusion

To keep a vehicle, you have to satisfy the vehicle lender’s lien on that vehicle. That means you have to arrange to pay that lien. Your Chapter 13 trustee cannot pay the lender under the terms of your court-approved payment plan without a proof of claim. If the lender neglected to file one on time, make sure that either you or the trustee files a proof of claim for the lender.

 

Lowering Your Vehicle Loan Payments through Chapter 13 Bankruptcy

April 29th, 2016 at 7:00 am

“Cramdown” of your vehicle loan can solve the problems of a reaffirmation agreement by lowering payments and protecting you much better. 

 

Our last blog post a couple days ago was about keeping your vehicle by “reaffirming” the vehicle loan under a Chapter 7 “straight bankruptcy.” We ended by stating that reaffirming a vehicle loan can lead to problems. This is especially true if you owe more on the vehicle than it’s worth. We said that a Chapter 13 case “would likely give you more flexibility…  . You may even be able to do a “cramdown,” reducing your monthly payment and potentially saving you thousands of dollars on the balance.”

That’s the topic of today’s blog post.

The Problems with Chapter 7 “Reaffirmation”

If you are current on your vehicle loan, and could comfortably afford to make the payments after you got rid of all or most of your other debts, reaffirming your vehicle loan in a Chapter 7 case may be the best way to go for you. But here are some very common problems that arise.

1. A potential large debt if your vehicle is repossessed in the future:  In a Chapter 7 case, if you own on your vehicle you almost always have to sign a “reaffirmation agreement” to keep that vehicle. That agreement makes you continuably liable for the full balance on your vehicle loan. That’s true even if that balance is more than the vehicle is worth. That puts you at risk for owing a substantial amount of money months or even years after your bankruptcy case is finished if you are ever not able to make the payments.

2. High monthly payment:  A “reaffirmation agreement” in a Chapter 7 case almost always requires you to maintain your full contractual monthly payment on the vehicle loan regardless whether or not you can afford it. You have to choose between right away surrendering the vehicle and writing off any debt, or else reaffirming the debt and having the challenge of making payments you can’t afford.

3. The challenge of catching up quickly on late payments:  If you are behind on your vehicle payments, with a Chapter 7 reaffirmation you have very little time to catch up—usually within just a month or two after your bankruptcy case is filed. If you want to keep your vehicle under Chapter 7, you must bring it current very quickly so that your lender will let you keep it and reaffirm the loan.

4. No protection from repossession:  After a Chapter 7 case is completed—usually only about 3-4 months after it is filed—the “automatic stay” protection against your creditors expires. So if you have a financial setback later and are late on your monthly payment or you let your vehicle insurance lapse—even for a matter of days—your vehicle could get repossessed. That would leave you with no vehicle but likely still owing on the vehicle loan.

“Reaffirmation” Problems Solved by Chapter 13 “Cramdown”

If you owe more on your vehicle than it is worth, AND IF you got your vehicle loan more than 910 days (about 2 and a half years) before your Chapter 13 case is filed, you can do a “cramdown” on that loan. This means that you will:

1. usually pay less for your vehicle than your contract would have required, often thousands of dollars less;

2. usually lower your monthly vehicle loan payments, sometimes significantly;

3. avoid needing to catch up on any late monthly payments; and

4.  be protected from vehicle repossession during the 3-to-5-year Chapter 13 payment plan, if you do what that plan requires.

How “Cramdown” Works

“Cramdown” is the informal name for a procedure for legally rewriting a vehicle loan, lowering how much you pay for your vehicle based on its fair market value.

Your new payment is based on the amount of the secured portion of the loan—the value of the vehicle. That portion of the full balance is often paid at a lower interest rate than the contractual rate, and the payments can often be stretched out over a longer period. Paying less, at a lower interest rate, and often over a longer period, results in a lower monthly payment, often much lower.

The remaining unsecured portion of the vehicle loan balance, the part that exceeds the value of the vehicle, almost never has to be paid in full. Often you pay only little of that portion, and you may even pay none of it. You pay it at whatever percentage your other unsecured debts are being paid, based on what you can afford. Often this unsecured portion of the vehicle debt does not increase what you would otherwise pay to all your creditors.

Again, “cramdown” is only available under Chapter 13.

 

Mistakes to Avoid–Surrendering Your Vehicle or Getting it Repossessed

September 2nd, 2015 at 7:00 am

Bankruptcy can save your truck or vehicle various ways. Enable you to pay for it by wiping out other debts. Or even likely pay less for it.

 

The Pleasant Surprises of Bankruptcy

Most of the time people go to see a bankruptcy attorney they are pleasantly surprised by what options are available to them. An important reason to see a bankruptcy attorney sooner rather than later is because then you will more likely be able to take advantage of those options. That’s very much true when it comes to your vehicle loan.

Surrender or Repossession Is Usually Very Expensive

Whether or not you should use bankruptcy to save your car or truck, surrendering it without having a well-informed game plan about what to do next is almost never a good idea. And worse is putting yourself into a situation that it gets repossessed.

Almost always if you surrender your vehicle or it gets repossessed you will end up owing money on the debt. After your creditor sells the vehicle and credits the sale proceeds against your account you will usually owe much more than you expect. Often shockingly more.

A big part of this is because your vehicle will likely be sold for less than it’s worth. The creditor is not necessarily trying to be unfair about this, because getting the debt paid as much as it can out of the sale proceeds—instead of chasing you for it—is in its own self-interest. But there’s a lot of hassle selling a repossessed vehicle, and the creditor wants to get money out of it quickly. So usually the most efficient way is to sell your vehicle at an auto auction. Most of the purchasers there tend to be used car dealers who don’t pay much because they need to make a profit when they re-sell your vehicle.

 Besides selling at a low price for its own efficiency, your creditor will pile onto your balance all of its repossession and sale costs, including attorney and court fees when it sues you. These add-ons, along with late fees and whatever else its one-sided contract allows, can really pile up.

Between selling low and adding all these costs, the end result is that you will likely owe an amazing amount of money. And very likely you will get sued to make you pay it, often quickly if you have a job or own a home. Or you’ll get sued as soon as you get a job.

Once your wages and/or bank account starts getting garnished, you may well be forced to consider bankruptcy. So it’s usually much better to consider your bankruptcy options BEFORE a surrender or repo.

The Problem

If you need your vehicle, but just can’t afford the monthly payments, it may seem that you don’t have much choice but to let the vehicle go. You know your contract requires you to make the payments or you lose the vehicle. You’ve probably been struggling for months to not fall behind, putting up with late fees and constant notices or phone calls from the creditor. You’ve been forced to consider how you can do without this vehicle.

How Chapter 7 “Straight Bankruptcy” Can Help

The main way the most common type of bankruptcy can help is by discharging (legally writing off) all or most of your other debts so that you can more easily afford your vehicle payments. If you are a month or two behind on your payments, filing the bankruptcy case would put an immediate stop to a pending repossession. You would then have a month or two, usually, to catch up.

Chapter 7 allows you to focus your financial energies on your most important debts. If for you that’s your vehicle loan, and if getting rid of your debts would help enough, filing a Chapter 7 case before losing your vehicle could be your best option.

How Chapter 13 “Adjustment of Debts” Can Help

But admittedly that may not be enough help.

You may be able to afford the monthly payments if you had no longer had any other debts, but then couldn’t also make up the missed payments within a month or two. Or you might have other important debts that you’re behind on and would still owe after a Chapter 7 bankruptcy, such as income taxes or child support, and so can’t afford your vehicle with all these continuing financial pressures. Or you might simply not be able to afford the monthly vehicle payments even without your other debt obligations.

Chapter 13 may be able to solve all of these problems:

  1. Chapter 13 can give up to 5 years to catch up on the back payments. You might not even need to catch up on them, ever.
  2. Chapter 13 often allows you to pay your vehicle payment first, even ahead of other important debts like income taxes and back child/spousal support.
  3. If your vehicle loan was entered into more than two and a half years ago and the vehicle is worth less than what you owe, you can do a “cramdown”: lower your monthly payment, and pay less overall for the vehicle.

How much the monthly payment can be reduced through “cramdown” depends on a bunch of factors. But especially if your vehicle is worth a lot less less than you owe on it, the payment can usually be made much lower. And you can often save thousands of dollars on the loan before owning your vehicle free and clear.

Choose Your Best Option and Keep Your Vehicle

Often you don’t have to surrender your vehicle or let it be repossessed, by keeping it through either Chapter 7 or 13. And often the sooner you act the better, especially if you qualify for a lower monthly payment under Chapter 13 “cramdown.”

Having a reliable vehicle is often essential to achieving a successful re-start of your financial life. It’s only sensible to get advice about your options before you lose this key to your return to financial health.

 

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