Force Your Lender To Lower Car Payments Using Chapter 13 Bankruptcy

Who doesn’t want to lower their car payments? Let’s face it, the second you drive your car off the lot, its going down in value. A Chapter 13 bankruptcy can be used to in effect reduce a car loan balance to the current value of the vehicle.  In essence, you can force your lender to lower your car payments to reflect what your car is actually worth. For example, debtor has a car worth $5,000, but the balance owing on the car loan is $9,000.  Lowering the car payments would be a big help. In certain circumstances, a Chapter 13 bankruptcy can be used to reduce the amount to be paid to the vehicle finance company to $5,000, plus interest at less than the contract rate, while paying little or nothing on the remaining $4,000 balance of the vehicle finance company’s claim.

  Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) of 2005, there were few restrictions on the ability of a Chapter 13 bankruptcy debtor to “cram down” a vehicle finance company’s claim.  Since the enactment of BAPCPA, the rules for cram downs on motor vehicles have changed.  If the motor vehicle was acquired within 2 ½ years (910 days) prior to the filing date of the bankruptcy, and the motor vehicle was purchased for the personal use of the debtor, the vehicle finance company’s claim cannot be crammed down or lowered.  However, if the debtor purchased the vehicle for someone other than the debtor, or for business use, the prohibition on cram down for vehicles acquired less than 2 ½ years ago does not apply.  Examples include a vehicle purchased for a child of the debtor, or a vehicle acquired for use in a business.

 A variation of “cram down” involves so called “negative equity” trade ins.  A “negative equity” trade in occurs when a person trades in a vehicle that is worth less than the amount owed on the loan secured by the vehicle, and the difference is added to the balance owed for the purchase of the new vehicle.  For example, debtor trades in a 2004 vehicle that is worth $15,000, but the vehicle loan balance is $20,000, and purchases a newer car for $25,000.  The vehicle finance company adds the $5,000 of negative equity to the balance owed on the newly purchased vehicle, for a new vehicle balance of $30,000. 

  Chapter 13 can be used to reduce the amount that must be paid to the vehicle finance company to eventually get free and clear title to the new vehicle.  The following is applicable in those states that are controlled by the rulings of the 9^th Circuit Court of Appeals (Ak, Az, Ca, Hi, Id, Mt, Nv, Or, Wa).  The creditor’s claim can be reduced proportionately by the amount of negative equity that was used in the purchase of the new vehicle. Using the example in the preceding paragraph, assuming debtor has made several payments on the new vehicle loan between the purchase and the chapter 13 filing, and reducing the car loan balance as of the filing to $28,000, the calculation is made as follows:

            1.  Percentage of negative equity used for the  new vehicle = $25,000/$30,000 = 83.33 %;

            2.  Balance as of filing = $28,000 x 83.33 % =  23,332.40. = amount to be paid to vehicle finance company plus interest at the lower of the contract rate or the prime rate plus an additional 2% to 4 %;

            3.  The remaining balance of the vehicle loan ($4,667.60) will be paid little or nothing depending on too many factors to discuss in this article.

 This “negative equity cram down” can be used even though the vehicle was purchased less than 2 ½ years prior to the bankruptcy filing for the debtor’s personal use. If you have questions about lowering your car payment through chapter 13 bankruptcy, contact a bankruptcy attorney.

Cary Gluesenkamp, Oregon Bankruptcy Attorney