If you're in a Chapter 13 bankruptcy, you may be able to reduce the amount you owe to a lender if you qualify for an auto loan cramdown. A cramdown reduces the loan balance to the value of an item, but it isn't available for every debt, or in every type of bankruptcy.
Using a Car Loan Cramdown
In order to use a car loan cramdown, you have to be in a Chapter 13 bankruptcy, and you have to owe more on your auto loan than your vehicle is worth. When you have negative equity, a cramdown can help save you money in your repayment plan by reducing how much you owe the lender. Instead of you paying the entire loan amount, you’re only responsible for the car’s actual cash value (ACV).
However, in order to qualify for this, you need to meet certain guidelines that are designed to protect lenders from losing their shirt on a new vehicle. These guidelines include owning the car for at least 910 days (about two and a half years) prior to filing for bankruptcy, and having a loan balance that's much higher than the value of the vehicle.
Additionally, your auto loan has to be included in your bankruptcy repayment plan, and your lender has to agree to the cramdown. If they don't agree, they can still begin a repossession after bankruptcy, or after the automatic stay (which prevents debt collection for a set amount of time during bankruptcy) has been lifted. Lenders can also petition the court to lift the automatic stay so that they can reclaim their property.
If the actual cash value of your car isn't very much, it could actually be in your lender's best interest to agree to your cramdown. They'll likely only get the vehicle's ACV when it's sold at auction – a common way cars are sold after a repo.
What About the Remaining Debt?
A Chapter 13 bankruptcy is known as a reorganization bankruptcy. Your court-appointed bankruptcy trustee comes up with a repayment plan that you must follow during the three or five years of your Chapter 13. During this time, secured debts are paid first, and any unsecured debts included in your bankruptcy may or may not be paid before they're wiped away in a discharge.
If your lender agrees to the cramdown, they'll set up a new contract with you and negotiate an amount that must be included in your Chapter 13 repayment plan. The remaining debt over the ACV of your vehicle gets added to the unsecured debts included in your bankruptcy.
Need a Different Vehicle Despite Bankruptcy?
If your vehicle doesn't qualify for a cramdown, and you need to lower the amount of your repayment plan, it's good to know that a Chapter 13 bankruptcy doesn't stop you from getting another auto loan. However, you have to be approved to take on any additional debt.
If you find you need a car during an open Chapter 13 bankruptcy, there's a process in place to help you finance an affordable vehicle. First, your trustee has to agree that you need a car, then you can find a bankruptcy auto dealer that's willing to work with you. After you sit down with a special finance manager and get a sample buyer's order, you can take this to your trustee, who then files a motion to incur debt with the bankruptcy court.
If the motion is approved, you're free to return to the dealership and complete the process of getting the car loan you need. Be aware, though, that this process could take awhile, and the vehicle you chose may have been sold. If this happens and the dealer didn't stipulate "or similar" on your sample buyer's order, you have to start the process over again.
Ready to Find a Bankruptcy Auto Dealer?
Whether or not you can cram down your auto loan, The Car Connection is here for you if you need to find a bankruptcy car loan. We work with a nationwide network of special finance dealerships that have lenders available to work with people in many types of unique credit situations, including bankruptcy.
To be connected to a dealer in your area, simply fill out our fast, free, and zero-obligation auto loan request form, and we'll get to work for you!