If you enter a Chapter 13 bankruptcy with negative equity in a car that you've financed, you may qualify for a loan cramdown. Of course, filing for bankruptcy should never be a decision that is taken lightly. The process can disrupt your life and damage your credit for years to come.
However, if you must declare bankruptcy, you may at least be able to save money on your car loan. But keep in mind that a cramdown is only possible for those who meet certain requirements. Also, cramming down a loan is not an option in Chapter 7 bankruptcy.
Chapter 13 Filers Who are Eligible for Loan Cramdowns
After filing for Chapter 13, you may be able to cram down a car loan if the following things apply:
- You've owned the car for at least 910 days (about two and a half years).
- The current value of your vehicle is less than what you owe on the loan balance (you have negative equity).
- Future payments (and back payments, if applicable) are included in your court-approved repayment plan.
Once you've determined that you're a cramdown candidate, you must renegotiate the terms of your car loan with the lender. Then, the terms of your financing agreement will be restructured and your payments will be recalculated to reflect the cramdown.
How a Car Loan Cramdown Can Save You Money
When a vehicle is financed, the loan is secured by the car itself. Basically, the car is the collateral. This is why, if you stop making payments on your loan, the lender can repossess the vehicle.
But the only part of your car loan that is secured is the amount that is equal to the fair market value of your vehicle. And cars depreciate in value over time. So, if you've had the vehicle for at least two and half years, your loan balance may exceed the current value of your car.
This is why, in a Chapter 13, you are allowed to petition the lender to reduce your loan balance to reflect the fair market value of your vehicle. For example, with a cramdown, if you still owe $14,000 on a car that is worth $11,000, you will own the car free and clear after paying back $11,000, plus interest.
Depending on where you live in the country, you may also be allowed to ask for an interest rate deduction. Some districts allow Chapter 13 filers to receive new interest rates that are equal to the prime rate plus a few points. For example, if the prime rate in your district is 3.5 percent, the new interest rate on your car loan might be 6.5 percent. And this could save you a lot of money if you had been assigned an APR of 8 percent of more.
In addition to balance and interest rate reductions, Chapter 13 filers might be allowed to alter their loan terms. For example, if a filer wants to reduce their monthly payment, they can ask for a loan extension.
Financing a Car During or After Chapter 13 Bankruptcy
If you need to buy a car during or after a Chapter 13, Auto Credit Express can help. We understand that credit damage due to bankruptcy can make it difficult to find auto financing. But we can match you with a local dealer that's capable of working with unique credit situations.
Also, our service is free and comes with no obligations, so you have nothing to lose. Go ahead and fill out our simple and secure auto loan request to get started today.