In a Chapter 13 bankruptcy a Debtor may be able to reduce the principal and interest that is paid on a car loan through a cramdown. In order to reduce the principal that a Debtor pays on a car loan, the car loan debt must have been incurred more than 910 days (approximately 2 1/2 years) before the bankruptcy case was filed. If that is the case, then the Debtor is only required to pay the value of the car at the time of the filing of the bankruptcy case over the life of the Chapter 13 Plan (from 3 to 5 years) with an interest rate that is currently about 5% (plus the trustee's fee). To determine the value of the vehicle one could look at the N.A.D.A.'s website and the value that is usually agreed to between the Debtor and the car lender is somewhere between the trade-in and retail value. If repairs are needed to put the vehicle into proper working order, an estimate for those repairs should be obtained in order to lower the value of the vehicle accordingly. It is not uncommon for a cramdown to save the Debtor thousands of dollars over the life of the Chapter 13 Plan. There is a similar mechanism in Chapter 7 for reducing the payoff of a car loan to the current value of the vehicle. In a Chapter 7 it is called a redemption. We will provide more details about redemptions in a subsequent blog post. For a more complete explanation of cramdowns and redemptions, give us a call at (608) 718-0497.
One of the most common questions I am asked by Debtors is, "Can I keep my car in a bankruptcy?" The answer is, "If you want to keep your car, you can almost always keep your car." One scenario in which you may not be able to keep your car would occur when you have more equity in your car than you can exempt. In Wisconsin, if you have $4,000 or less in equity in your vehicle you can usually exempt it. If you have more equity than that, then, it depends. The most equity you can possibly exempt in a vehicle in Wisconsin is $17,900. How is a car loan treated in a bankruptcy? There are four options in Chapter 7: reaffirmation; ride-through; redemption; and surrender. In Chapter 13, depending on the circumstances, you can: continue to pay your loan outside the Plan; pay the loan off in your Plan over a longer period of time and possibly at a lower interest rate; pay off the loan with a principal reduced to the value of the vehicle ("cramdown"); surrender the vehicle; or a combination of the afore-mentioned. I will be describing those options in more detail in subsequent blog entries. For an explanation of what exemptions are and how they work, give us a call.
According to Yahoo News, a 35-year-old man had his $100,000 in student loans discharged by a bankruptcy court in Delaware 2 weeks ago. The Debtor represented that "he struggled to find a full-time job after graduating college in 2010, and nine years later, when working full-time for ride-hailing services, he had a seizure and totaled his car." The judge decided that the Debtor met the standards for an "undue hardship" needed to qualify for the discharge of student loans in a bankruptcy. Will the Debtor ultimately prevail? It seems that he will, for although the U.S. Department of Education filed a notice of appeal of the decision, The Daily Poster reported a few days later that the Department has now announced that it is withdrawing its appeal. The history of decisions on this issue has set a high bar for those wanting to get a discharge of student loans in a bankruptcy. The Yahoo News article goes on to point out that there has been movement in both the U.S. Senate and the U.S. House of Representatives to make it easier to get student loans discharged in a bankruptcy. This seems to indicate that Congress does not believe there is currently a statutory basis for allowing courts to ease the undue hardship standard. It is hard to know at this point whether the Delaware case is a harbinger of things to come in other bankruptcy courts around the nation or whether it is just an outlier.