A Chapter 13 bankruptcy allows you to pay less for your vehicle by cramming down the value of your vehicle to the fair market value.
HOW DOES "CRAMDOWN" IN A CHAPTER 13 WORK?
If you owe more on your vehicle than it is worth, AND IF you got your vehicle loan more than 910 days (about 2 and a half years) before your Chapter 13 case is filed, you:
1. can usually pay less for your vehicle than your contract would have required;
2. can usually lower your monthly payments, sometimes very significantly;
3. do not need to catch up on any late monthly payments;
4. can usually reduce the interest rate you are paying on your vehicle loan; and
5. will be protected from repossession during the 3-to-5-year case, if you do what your Chapter 13 plan provides.
"Cramdown" is the informal name for a procedure for legally rewriting a vehicle loan, lowering how much you must pay for your vehicle based on its fair market value. You pay the secured part of the loan—the amount equal to the vehicle's value. That lower amount is often paid at a lower interest rate than your contractual rate, with the payments stretched out over a longer period. Paying less, at a lower interest rate, and often over a longer period, results in a lower monthly payment, often significantly lower.
The remaining unsecured part of the vehicle loan balance, the part that exceeds the value of the vehicle—almost never has to be paid in full, is usually paid little, and may even be paid nothing. It is paid at whatever percentage your other unsecured creditors are being paid, and often does not increase what you would otherwise pay to all your creditors.
Example: If you have a vehicle worth $10,000, but you owe $15000 then a Chapter 13 bankruptcy would allow you to pay $10,000 to the secured creditor. You can spread this payment over a 36 to 60 month term (depending on your plan). The remaining $5,000 would be treated as unsecured and be paid at the same rate as other unsecured creditors (usually this is minimal).
Overall, "cramdown" can save you hundreds of dollars each month, and often enables you to own your vehicle free and clear for thousands of dollars less than would be required otherwise. "Cramdown" is only available under Chapter 13.
BUT WHAT IF MY VEHICLE LOAN IS NOT YET 910 DAY OLD?
You do not qualify for "cramdown" of that loan. At least not yet.
Considering its huge potential advantages, when you meet with your bankruptcy attorney discuss whether you should wait to file a Chapter 13 case until after the 910 days have passed. It may be worth waiting, especially if that point in time is coming soon.
Otherwise, be aware that Chapter 13 can be better than Chapter 7 for your vehicle loan even if you don't qualify for "cramdown."
CAN I REDUCE MY CAR PAYMENT IF I DO NOT QUALIFY FOR A CRAMDOWN?
You can reduce your car payments in a Chapter 13 bankruptcy even if you do not qualify for a cramdown. Chapter 13 bankruptcy allows you to spread your car payments over a 36 to 60 month term which can reduce your monthly payments.
Example: If you owe $9000 on your vehicle and your monthly payments are $600 a month, a Chapter 13 bankruptcy would allow you to spread the $9000 with interest over a 60 month term. This can substantially reduce the monthly payments.
A Chapter 13 bankruptcy can offer you a great deal of flexibility to reduce your car payments. It gives you the ability to reduce your interest and balance, spread your payments over a longer term, and to catch up on your payments. If you are struggling with a high car payment, Chapter 13 bankruptcy can provide you with the tools to reduce your payment.