Want to Pay Less for Your Car? A Chapter 13 May be the Answer
Sometimes, a Chapter 13 bankruptcy can do wonderful things. You may be able to get rid of a second mortgage or judgment liens, pay back your creditors at a fraction of what you owe, or actually pay less than you owe on a vehicle. In bankruptcy lingo, the last situation is what is called a "cramdown". A cramdown allows you to pay the value of your vehicle through your Chapter 13 plan, as opposed to what you owe. Sounds good so far. But, of course, there are conditions that must be met.
The most important requirement is what is called the "910 day rule" which, in essence, states that you cannot cram down a purchase money security interest in a vehicle purchased within 910 days (roughly 2 1/2 years) before the filing of your case. So if you took out a loan and purchased a car with it last year, you cannot cram it down. However, even if you cannot do a cram down, you can still often lower the interest rate on your auto loan if you pay it through the Chapter 13 plan. Currently, you can lower interest rates to 6.5% on vehicles paid through your repayment plan. (This changes periodically, so check with an attorney). This alone can save you thousands of dollars over the course of your loan.
So what about about a vehicle purchased more than 910 days ago? Well, then you're in business. If you purchased your vehicle more than 910 days ago, you can pay the value of the vehicle through your Chapter 13 plan as opposed to what you owe. So, for example, if you have a vehicle that you owe $15,000 on, but that is only worth $10,000, you can pay the $10,000 (with interest, of course) through the plan and emerge with the vehicle free and clear.
Although cramming down a loan on a vehicle is a powerful tool, one of the biggest obstacles relates to the value of the vehicle. The amount owed and the date of purchase are factual matters that are easily determined. So how do you determine just how much your car is worth? Unfortunately, this is where the bad news comes in. The value of the vehicle is determined by its replacement cost (what it would cost you to buy a new one from a dealer). This is obviously the highest value. And sometimes this prevents a cramdown on a vehicle that might otherwise qualify. However, even under these circumstances, it can still be beneficial to cram down the loan through the plan.
But there is also another caveat that can help you pay less even if you took out the loan within 910 days of the filing of your bankruptcy. The Bankruptcy Code only prevents you from cramming down a purchase money security interest. A purchase money security interest is simply a security interest in collateral that was purchased with the loan. So when you take out a car loan and use the money to buy the vehicle, the lender has a purchase money security interest in the car. The reason this is important to know is because if you took out the loan for any other purpose than to buy the vehicle (e.g. refinance), the 910 day rule does not apply. It's important to disclose this to your Chapter 13 attorney if this is your case.
To speak with an experienced Ohio bankruptcy attorney, or for more information on Chapter 7 and Chapter 13, call me at 330-605-3508. We offer a FREE CONSULTATION where you can see if bankruptcy is right for you.