A cramdown can save you some cash on your auto loan if you’re filing a Chapter 13 bankruptcy.
How Cramdowns Work
When you finance a vehicle, your lender has a security interest in it. Having a security interest means the lender can repossess your car if you stop making payments and default on the loan.
In a Chapter 13 bankruptcy, you’re allowed to cram down certain secured debts. When you do this, you reduce the loan balance to the value of the vehicle, instead of what you owe on your auto loan. The difference is lumped with your other unsecured debts. Once your bankruptcy is discharged, you own your car free and clear, and anything remaining from the difference is wiped out at the end of the bankruptcy plan. If you paid any of your unsecured debts, it’s likely to be only a percentage.
In order for this to work, your vehicle has to be worth less than the loan balance, called negative equity. A cramdown wouldn’t help if you had equity or your balance on the loan was equal to the actual cash value of your car.
Car Loan Cramdown Requirements
There are few boxes that need to be checked if you’re looking to do an auto loan cramdown while you’re in a Chapter 13 bankruptcy filing. A cramdown isn’t an option if you’ve filed for a Chapter 7.
Here are the requirements for getting approved for a cramdown:
- You have negative equity, also known as being upside down on the loan
- Your car payment is included in your court-approved repayment plan
- You’ve had the vehicle for at least 910 days (around two and a half years)
If you’ve checked those basic requirement boxes, you could be a candidate for an auto loan cramdown!
In any other scenario, being upside down on a car note isn’t the greatest position to be in. But with a cramdown, you only make payments on the vehicle’s value, instead of the loan balance.
The 910-day rule for cramdowns is so people don’t purchase a new car then immediately file for bankruptcy so they can cram down the loan.
Benefits of a Cramdown
If you’re worried about keeping up with your auto loan payments, a cramdown can help avoid a repossession once/if the automatic stay is lifted.
This is because you’re making payments that are based on the value of the car, and lowering your monthly payment through a bankruptcy repayment plan. In some cases, you may be able to lower your interest rate, as well.
A cramdown may be able to help you avoid a repossession if you're worried about keeping up with the payments. You should do all you can to avoid a default – especially if you’re filing for bankruptcy. This is because a repossession on top of the negative impact of a bankruptcy could really harm your credit score, and lower your chances of getting into another auto loan for a while.
After a Bankruptcy Discharge
Once your bankruptcy has been discharged, you can typically get into another car loan right away if you work with the right lender. At Auto Credit Express, we’ve created a nationwide network of subprime lenders that work with borrowers in all types of credit situations, including bankruptcy.
We match people to local dealerships with the resources they need. To get connected to a dealer with special finance options, complete our auto loan request form and we’ll get right to work for you.