Many debtors with serious financial problems also own vehicles that are underwater. Fortunately, the federal Bankruptcy Code offers several options for the debtor to consider. One of the most sensible for many debtors is a Chapter 13 cram-down of the vehicle loan. A cram-down is simply the reduction of the amount that is owed to the fair market value of the vehicle. The debt is “crammed down” to what the vehicle is worth.
The basic rules of a cram-down are pretty straightforward:
- A vehicle cram-down is only available in a Chapter 13 case (different options exist in other bankruptcy chapters);
- The vehicle must be for personal use;
- The debt must have been incurred more than 910 days (about 2 ½ years) before filing the bankruptcy petition ; and
- The loan must be more than the fair market value of the vehicle.
A cram-down is accomplished through a court order and confirmed Chapter 13 bankruptcy plan. The bankruptcy court will receive evidence of the amount owed and the value of the vehicle. Once the court approves the cram-down, the amount of the secured claim will be the same as the value of the vehicle. The remaining balance will be ordered as unsecured, and will likely be discharged at the end of your bankruptcy case.
The new secured balance is paid to the Chapter 13 trustee who pays the creditor. The balance also includes a new court ordered interest rate. The approved rate of interest is directed by the United States Supreme Court in Till v. SCS Credit Corp, and commonly called the Till rate. The Till rate is often less than the debtor’s original interest rate, and lowers the monthly payment.
While the federal bankruptcy laws are meant to be uniform across the country, the sweeping changes to the Bankruptcy Code in 2005 left many questions that are still being resolved by different circuits. For instance, recently the Ninth Circuit in the case of In re Penrod broke from the rest of the country and decided that the amount of negative equity in a trade-in that was rolled into a new vehicle loan could be stripped off, even when the loan is less than 910 days old. This case highlights the different interpretations of the new bankruptcy laws and why it is critical to retain experienced counsel for your case.
If you are considering bankruptcy and own a vehicle that is underwater, speak with an experienced Freedom Law Firm bankruptcy attorney at 702-745-8584 and discuss your options. Your attorney can explain the several options for keeping or surrendering a vehicle during bankruptcy, and help you decide the best course of action for your family.