In a previous blog we discussed a concern that many people express when reviewing their options connected with bankruptcy filing: car repossession. When individuals file bankruptcy, protections against asset seizure are put in place until the court creates a plan to resolve the debt issues. In drafting a plan, the court strives to provide options favorable to all parties involved.
One such option available to those filing Chapter 13 bankruptcy is call a "cramdown." The cramdown provision benefits both debtors and creditors. Debtors are able to retain their property, lengthen the time provided for debt repayment and lower monthly payments to disburse the debt. While accepting a reduced payment for the debt, creditors benefit from the cramdown because it allows them to receive more money under this condition than they would have if the debtor had just defaulted on the loan.
As with many bankruptcy issues, the cramdown option is available to those meeting certain requirements. Here are some points to keep in mind if you are considering using this method to retain property when filing bankruptcy:
The cramdown policy can be applied to certain loans: car, personal property loans and mortgage on property that is not a primary residence. These loans must have secured debt, which means that the debt is guaranteed by some asset that was used to secure the loan. In the instance of an automobile loan, the automobile is used to secure the loan. It can be repossessed should the debtor fall behind on payments, which is an outcome prevented with the cramdown provision.
When the court approves of the cramdown for a car loan, the outstanding balance of the secured debt may be reduced by the car's value. For example, if a loan for $30,000 had been extended for a car appraised at $15,000, the secured debt owed could be reduced to $15,000. The recalculation of this secured debt reflects the amount of money a creditor would receive upon seizing the car. Any remaining balance on the loan would be considered an "unsecured debt" and would be rolled into a pool with other unsecured debts. A bankruptcy plan would determine the percentage of the unsecured debt that would need to be repaid. By the conclusion of the repayment plan, the car's title would belong to the debtor and not the creditor.
In order to prevent individuals from sheltering new assets from seizure, there are restrictions regarding the loans that can be restructured through cramdowns. For those seeking to retain ownership of their cars, the 910-day rule is in effect. According to the provisions of this rule, individuals must have received a car loan at least 910 days before filing bankruptcy.
For those who meet the qualifications for cramming down a car loan, the benefit is obvious: retaining ownership of the car with reduced monthly loan repayment. As with many bankruptcy options, this alternative method of debt repayment may be complicated to negotiate. Those considering the benefits of cramming down an auto loan are advised to seek the guidance of a knowledgeable attorney to determine the best course of action to take.