Timing: Qualifying for Vehicle Loan Cramdown

 Posted on September 27, 2017 in Vehicle Loans

If your vehicle is worth less than you owe on it, with good timing cramdown could reduce your monthly payment AND the total amount you pay.

Vehicle Loan Cramdown

“Cramdown” is an informal term for one of the most tangible benefits of Chapter 13 “adjustment of debts” bankruptcy. You won’t find the term in the federal Bankruptcy Code, yet lawyers and judges use it all the time.

It refers to a procedure provided under Chapter 13 law for legally rewriting a vehicle loan. It results, usually, in reducing both the monthly payment and the total you pay for the vehicle. The more your vehicle is “underwater”—worth less than what you owe on it—the more you benefit from cramdown.

Secured and Unsecured Parts of a Vehicle Loan

Cramdown works by dividing the total amount you owe on your vehicle loan into secured and unsecured parts.

The secured part you must pay for sure. But because that amount is less than the total amount you owe, the new monthly payment amount based on it will naturally be less. You can also often reduce the interest rate. Plus you can usually stretch the monthly payments out over a longer period than the original loan. These all reduce your monthly payment.

The remaining unsecured part of your vehicle loan you pay only as much as you can afford. It’s just part of all your “general unsecured” debts. Usually you pay these only to the extent you have available money during the life of your case, money not already going either to living expenses or to other more important debts. So, often you end up paying the unsecured part of your vehicle loan just pennies on the dollar.

Combining all this, cramdown gets you to a free-and-clear vehicle for a lot less money.

See Section 1325(a)(5) of the Bankruptcy Code, and the odd “hanging paragraph” referring to that subsection, found right below Section 1325(a)(9).

Non-Timing Conditions for Cramdown

Cramdown only works if your vehicle is worth less than the balance on the loan. You’re “cramming down” the loan amount to the secured amount, so this assumes that the secured amount is less.

It’s also worth emphasizing again that cramdown is ONLY available in a Chapter 13 case, not Chapter 7. Chapter 13 provides a way—through the court-approved payment plan—to divide the debt into secured and unsecured parts, and pay accordingly. Chapter 7 “straight bankruptcy” doesn’t let you do cramdown.

Cramdown also requires the motor vehicle collateral to have been “acquired for the personal use of the debtor.” (See the “hanging paragraph” referred to above.) So no cramdown on vehicles acquired for business use.

The Timing Condition

If you meet all the above conditions you still don’t get cramdown without one more timing condition. You must have entered into your vehicle loan more than 910 days before your Chapter 13 case is filed. (That’s slightly less than two and a half years.)

What’s the point of this timing condition? It wasn’t always part of the law. It was added in 2005 to give a bit more advantage to auto loan creditors. Vehicles, especially new ones, depreciate quickly, especially during their first several years. This 910 –day rule prevents a debtor from financing a vehicle and then doing a cramdown on it quickly.

Conclusion

So be aware of this timing rule when you first go in to see your bankruptcy lawyer. Bring your loan vehicle paperwork (or whatever you have available) to see if and when you qualify for cramdown. You’ll find out how much you can lower your vehicle payment, and how much you can save overall.