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.
- Carl Rolsma