“Cramming Down” a Car Loan in Chapter 13 Bankruptcy

One underrated benefit of filing for chapter 13 bankruptcy is that, under certain circumstances, a bankruptcy debtor can use the Bankruptcy Code to require a car lender to lower the vehicle’s loan balance down to its fair market value (FMV). Even in a strong economy, almost all vehicles (unlike real estate) continue to depreciate over time.

Due to declining real estate prices in the metro Denver area, most areas of Colorado and nationwide, many of my chapter 13 clients file because they are upside down (e.g. have negative equity) on one or two mortgages, and are facing imminent foreclosure of their home. Add to this a high amount of unsecured debt, such as credit card debt or medical bills, and the reasons for filing chapter 13 are compelling, particularly for higher income filers. Although most debtors hardly file for chapter 13 solely to cram down the loan balance on a car, such does serve as an added benefit such the chapter 13.

In a 2004 United States Supreme Court case, Till v. SCS Credit Corp., 541 U.S. 465 (2004), the nation’s highest Court made it easier for chapter 13 debtors to effectuate a cram down on a car loan. From this decision, the three primary benefits of the cram down are: (1) loan balance reduced down to fair market value of vehicle (in its condition existing at the time of the bankruptcy filing), (2) reduced interest rate, possibly as low as 4.5%, and (3) if the car loan is scheduled to mature before expiration of the 36 to 60 month chapter 13 plan, an lengthened loan term which matches the date the of completion of the chapter 13 plan. The primary requirement is that the car must have been purchased by the debtor at least 910 days (approximately 2.5 years) prior to the date of the bankruptcy filing, so those purchasing a newer car are not entitled to a cram down.

The following example will help explain the Till principle more effectively. Debtors (husband and wife) jointly own two vehicles: a 2004 GMC Envoy (FMV: $8,000, Debt: $13,000, Interest rate: 12%) and a 2007 Nissan Pathfinder (FMV: $16,000, Debt: $23,000, Interest rate: 14%). Each car was purchased over 2.5 years prior to the date of the joint filing.

The cram down forces each respective lender to accept the following contractual revisions: payment of $8,360 ($8,000 plus 4.5% interest) spread over 60 months for the 2004 GMC Envoy, and $16,720 ($16,000 plus 4.5% interest) spread over 60 months for the 2007 Nissan Pathfinder.

A couple of caveats: since the crammed down loan payments are made through the Colorado chapter 13 trustee, and not directly to each respective secured lender, a 10% trustee fee (included as the overall cost of administering the chapter 13) is added to the portion of the plan payment attributable to the crammed down secured loan payments. (But, the thousands of dollars in principal and interest saved over the course of the 36 to 60 month chapter 13 plan, in most cases, will heavily outweigh the minimal fee paid to the chapter 13.)

Another caveat is that a bankruptcy debtor will not be eligible to Cram Down a secured car loan on jointly owned property, unless the co-owner/spouse is filing for bankruptcy as well (on the same petition).

Third, while factoring in the 10% chapter 13 trustee fee, it’s typically not worth the effort to request a Crammed Down car loan in chapter 13 if the amount of negative equity is nominal (e.g. FMV: $10, Debt: $10,500), unless the interest rate is excessive.