There is a way to save money on your auto loan if you have filed for Chapter 13 bankruptcy. This is called a cramdown, and it can only be used if you owe more on your car. than what it is worth. Here’s how the restrictions on auto loans work.
Chapter 13 Bankruptcy and Cramdowns
When you file for Chapter 13 bankruptcy, some of your unsecured debt may be discharged after you’ve paid off what you can handle.
The difference between secured debt and unsecured debt is that secured debt means the lender can repossess the financed item, such as your vehicle. This means that if you stop paying and don’t pay off your secured auto loan, your lender can repossess your car.
After you file for Chapter 13 bankruptcy, you have the option of “reducing” certain secured debts if you qualify, including auto loans. This means that you reduce the balance of what you owe on the vehicle to its actual cash value (ACV), and the ACV is all you’re likely to pay.
Instead of paying more than the value of the car, you can work with your trustee during your bankruptcy to pay off the actual value of the vehicle instead of having to pay negative equity that you won’t get a return on if you decide to sell the vehicle. car later.
You must have negative equity to reduce your car loan during Chapter 13 bankruptcy, which means you must Following on the vehicle than what it is actually worth or what it can be sold for. If you have equity in your car, which means you have to less than its ACV, then a cramdown does not apply. If you reduce the negative equity in your vehicle, it gets added to the rest of your unsecured debt.
A Chapter 13 bankruptcy is called reorganization bankruptcy because you and the trustee work together to reorganize your finances and help you pay off as much as possible. In the end, you are released (if you complete it successfully) and the balance of any remaining unsecured debt is cleared after your repayment plan is completed. This means that there is a good chance that some (or all) of the negative equity in your car will be wiped out.
Other Requirements of a Cramdown During Bankruptcy
Not everyone can claim escalation in a Chapter 13 bankruptcy. Here are the requirements that you and your car must meet:
- You filed for Chapter 13 bankruptcy, not Chapter 7
- Must have negative equity in your vehicle
- Payment for your car is included in your repayment plan (future payments and possibly arrears)
- You have owned the vehicle for at least 910 days
The reason you must have had your car for about two and a half years is that it dissuades borrowers from taking out an auto loan and then filing for bankruptcy in an attempt to free up negative equity immediately. Many borrowers find themselves in a situation of negative equity at the start of their car loan.
In almost every other situation, having negative equity in your vehicle isn’t the best feeling. However, when you are in Chapter 13 bankruptcy, you can work with your trustee and get back on your feet and in a position of equity. As we said, Chapter 13 bankruptcy is reorganization bankruptcy. The idea is to come out at the end in a better position than three or five years ago.
After a discharge from bankruptcy
If you feel that you may not be eligible for compensation during your bankruptcy, then perhaps selling the vehicle or simply paying off the negative equity could be the solution.
Once you are released from bankruptcy, you can usually change cars fairly quickly if you work with the right lender. There are dealerships with special financial services who have the resources to help borrowers with bad credit, including those whose bankruptcy was recently cleared on their credit reports.
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