Upside Down on Car Loan – Chapter 13 Cram Down (*7*) and Chapter 7 Redemption

Clients typically discover themselves in want of debt reduction due to a automotive loan gone badly.

Modern day society necessitates proudly owning and sustaining an vehicle which generally evolves right into a devastating monetary burden. Lenders are fast in financing automobiles understanding debtors extremely prioritize vehicle transportation over most different monetary obligations. Even debtors with a bad credit score are fitted into an vehicle financing packages priced at excessive rates of interest to compensate aggressive lenders for the added danger.

Financial problem typically arises from auto financing. The completely satisfied automotive purchaser drives their new automobile off the lot financed practically 100%. As the saying goes, virtually instantly thereafter, the brand new automobile depreciates in worth a number of thousand {dollars} earlier than it’s even hits the freeway.

Automobile transportation prices $4,000.00 to $6,000.00 yearly together with auto loan funds, legal responsibility and collision insurance coverage, repairs and upkeep and gasoline.

Havoc begins when an sudden automotive restore not lined by guarantee, or a motorcar accident, unexpectedly and considerably decreases the worth of the automobile far beneath the excellent loan steadiness owed to the financial institution. Or, maybe extra harmlessly, on a trade- in for a brand new automobile the place keen automotive salespersons and lenders agree to soak up your previous automobile on commerce, and throw the remaining excellent steadiness out of your previous automotive loan (for a bit of greater cost) on the again-finish of your new auto loan leaving the brand new automotive purchaser significantly ‘upside-down’ on the brand new automobile buy.

These conditions go away the borrower in a predicament the place sizable parts of revenue are devoted in direction of masking an unsecured auto debt obligation that’s of no use in direction of sustaining modest prices of requirements for household dwelling.

Under sure circumstances reduction from these devastating monetary predicaments will be obtained by means of a chapter submitting.


Under Chapter 13 of the United States Bankruptcy Code, Debtors are permitted to ‘Cram Down’ the unsecured portion of their auto loans to the honest market worth of the automobile securing the loan. This requires debtors to pay again solely the secured portion of the auto loan, however the unsecured steadiness is handled as a normal unsecured collectors offering substantial profit for the Debtor, allowing Debtor to solely pay a small fraction of the unsecured portion of the auto loan debt that’s owed.

As an instance, let’s suppose our debtor owns a automotive price $10,000.00 and there may be an auto loan with a payoff steadiness of $20,000.00. In this situation, the loan is barely partially secured. The auto lender is secured solely to the extent of the worth of the automobile or $10,000.00. The remaining $10,000.00 steadiness on the loan is unsecured. In this example the Bankruptcy Code affords the Debtor the appropriate to chop off the unsecured portion of the auto loan and deal with that portion of the loan as unsecured. So, if General (*13*) Creditors had been solely receiving a dividend of 20%, the auto lender would obtain solely $2,000.00 on its unsecured portion of the auto loan.

These conditions grow to be sticky between Debtor and Lender as a result of typically disagreements come up as to the proper worth of the automobile. Your chapter legal professional might want to negotiate a settlement over the valuation earlier than affirmation of the Debtor’s Chapter 13 plan.

Valuation is guided underneath provisions of the United States Bankruptcy code, particularly 11 U.S. Code § 506 – Determination of Secured Status.

11 USC §506(a)(2) particularly states:

“If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined” emphasis added

The Cram Down provision underneath the chapter code additionally offers for a discount of the rate of interest on the auto loan. Often Debtors discover themselves shelling out monumental auto funds used to cowl exorbitant rates of interest auto lenders typically cost to dangerous debtors.

An fascinating exception was enacted underneath the 2005 Amendments to the United States Bankruptcy Code prohibiting cram downs the place the acquisition cash auto loan was originated inside 910 days (2 ½ years) of the submitting date of the Chapter 13 chapter [see 11 U.S.C §1325(a)(9)]. Debtors should think about timing of a Chapter 13 submitting in the event that they want to flee the burden of a burdensome auto loan debt. Bankruptcy guidelines require automotive loans taken out inside 2 ½ years of the chapter submitting should be paid as agreed.


Cram downs aren’t permitted underneath Chapter 7 chapter (or ‘straight chapter’). But, Chapter 7 debtors are permitted to ‘redeem’ private property underneath 11 U.S.C. §722.

11 U.S.C. §722 offers as follows:

“An individual debtor may… redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempted under section 522 of this title or has been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption.” emphasis added

Redemption, nevertheless, will be tough underneath Chapter 7 as a result of debtors should pay upfront in full a lump sum of money an quantity ample to pay the secured portion of the auto loan measured by the honest market worth of the automobile on the time Debtor seeks to redeem the automobile. Chapter 7 doesn’t allow a restructuring of the loan, however generally the auto lender will settle for funds over time, however normally inside a brief time period.


If your automobile is price lower than you owe on it, chapter choices will be advantageous in direction of affording you to retain your automobile and transfer in direction of higher monetary well being.

Chapter 13 can scale back or ‘cram down’ your loan steadiness and rates of interest thereby decreasing your auto cost making it inexpensive. Chapter 13 additionally allows you to restructure late auto funds and unfold them over the time period of the Chapter 13 plan so you’ll be able to afford to catch up the late funds inside your private monetary means.

Chapter 7 chapter doesn’t accommodate restructuring of loan repayments however the §722 redemption provisions enable debtors to buy their automobiles out of chapter for the honest market worth of the automobile, leaving the unsecured portion of the debt discharged underneath the Chapter 7 chapter.

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