“Cram Down” of Auto Loans -Being an Indianapolis Chapter 13 Bankruptcy Attorney, I have gone through the “cram down” process for auto loans in Chapter 13 bankruptcy very frequently. This “cram down” provision allows for a debtor to reduce the secured amount that must be repaid for their car or truck down to the current market value of the vehicle. Let me explain how “cram down” works.
If a car is eligible for a cram down, then you will only be required to pay the current market value of the car back to the creditor. As an example, if your loan for the automobile was for $12,000 but the current market value was for $8,000, you would only have to pay back $8,000 as your secured debt amount. You could save considerably because you would not have to pay back (at least 100%) almost $4000 (plus whatever interest). In addition, you will likely only have to repay at an interest rate at about 4.5-5%.
When Congress wrote the Bankruptcy Code, they wanted to treat different “classes” of creditors as fairly and evenly as possible. Therefore, to address part of this concern, Congress added Section 506 of the Bankruptcy Code. For automobiles, Section 506 of the bankruptcy allows auto loans that are more than 910 days old (or approximately 2.5 years old) to be “crammed” down to market value. Because these “older” auto loans can be (in reality) greatly unsecured after 2.5 years, Congress decided that it was fair both to the debtor and other creditors to only pay the secured portion back to the creditor with interest. The rest of the auto creditor’s claim is then treated the same as all other unsecured creditors are treated within the Chapter 13 plan.
The “910” rule generally applies to a “purchase money” creditor only who lends to the debtor for a personal use vehicle. It may be possible in some situations to cram an automobile beforehand if a vehicle has been refinanced by a new lender (or possibly the same lender), the automobile is used for business use, or possibly if the vehicle was purchased for someone else instead of the debtor. Such situations could be sufficient to surpass the requirements of “purchase money” and “personal use.” However, it is very likely that your creditor could object in your Chapter 13 case. If that is the case, you will need to either settle with the creditor or let the judge decide if you can cram your automobile in such a situation.
As an Indianapolis Chapter 13 Bankruptcy Attorney, I have seen many success stories play out over the years when our clients have crammed down their automobile loans in a Chapter 13 case. We have seen budgets that simply do not work. We have also seen massive balances that will never allow our client to pay off the vehicle before it breaks down. Situations like this are perfect for the Indiana residents to take advantage of Chapter 13’s cramming provisions.
~Indianapolis Chapter 13 Bankruptcy Attorney John Bymaster