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Customers often need debt relief because of a car loan that has gone badly.
Modern day society requires owning and maintaining an automobile which sometimes turns into a devastating financial burden. Lenders are quick to finance vehicles knowing that borrowers highly prioritize automobile transportation over most other financial obligations. Borrowers with bad credit are also fitted into automobile financing packages priced at higher interest rates to compensate aggressive lenders for the added risk.
Financial hardship often results from auto financing. The happy car buyer drives his new vehicle off the lot almost 100% financed. As it is called, almost immediately after that, the new vehicle depreciates several thousand dollars in value before it even hits the highway.
Automobile transportation costs $4,000.00 to $6,000.00 annually which includes auto loan payments, liability and collision insurance, repairs and maintenance, and gasoline.
The havoc begins when an unexpected car repair not covered by warranty, or a motor vehicle accident, unexpectedly and significantly reduces the value of the vehicle by the outstanding loan balance owed to the bank. Or, perhaps more harmlessly, on a trade-in for a new vehicle where an eager car salesman and lender agree to take your old vehicle on trade, and the remaining balance from your old car loan (for a slightly higher payment) For) throw on. The back-end of your new auto loan leaves the new car buyer with considerable ‘upside down’ on the new vehicle purchase.
These situations leave the borrower in a predicament where the bulk of the income is devoted to covering an unsecured auto loan obligation that is of no use to maintaining the modest costs of essential items for family living. .
In some circumstances, relief from these devastating financial woes can be obtained through a bankruptcy filing.
Chapter 13 Crammed Down Provisions
Under Chapter 13 of the United States Bankruptcy Code, debtors are allowed to ‘cram down’ the unsecured portion of their auto loan to the fair market value of the vehicle receiving the loan. This requires debtors to pay back only the secured portion of the auto loan, but treat the unsecured balance as normal unsecured creditors, providing a substantial advantage for the debtor, requiring the debtor to pay only the portion of the auto loan debt. A small fraction of the unsecured portion is allowed to be paid. That’s due.
As an example, let’s say our borrower has a car valued at $10,000.00 and an auto loan with a payment balance of $20,000.00. In this scenario, the loan is only partially secured. The auto lender is protected only to the extent of the value of the vehicle or $10,000.00. The remaining $10,000.00 balance on the loan is unsecured. In this situation the bankruptcy code gives the debtor the right to deduct the unsecured portion of the auto loan and treat that portion of the loan as unsecured. Therefore, if general unsecured creditors were only receiving a dividend of 20%, the auto lender would only receive $2,000.00 on the unsecured portion of the auto loan.
These situations become sticky between the debtor and the lender because disagreements often arise as to the true value of the vehicle. Your bankruptcy attorney will need to reach an agreement on the valuation before the debtor’s Chapter 13 plan can be ratified.
The valuation is guided under the provisions of the United States Bankruptcy Code, specifically 11 US Code § 506 – Determination of Secured Status.
11 USC §506(a)(2) specifically states:
“If the debtor is an individual in a case under Chapter VII or XIII, such value in respect of personal property shall be determined on the basis of the replacement value of such property as on the date of filing the petition without any deduction .For the cost of sale or marketing. In relation to property acquired for personal, family, or household purposes, replacement value shall mean the value which a retailer, having regard to the age and condition of the property at that time, would prescribed” emphasis added
The cram down provision under the Bankruptcy Code also provides for a reduction in the interest rate on auto loans. Borrowers often find themselves missing out on the hefty auto payments used to cover the high interest rates auto lenders often charge risky borrowers.
An interesting exception was enacted under a 2005 amendment to the United States Bankruptcy Code, prohibiting cramdowns where the purchase money auto loan originated within 910 days (2 ½ years) of the Chapter 13 bankruptcy filing date. Was. [see 11 U.S.C §1325(a)(9)], Debtors should consider a Chapter 13 filing at the time if they wish to avoid the burden of a heavy auto loan debt. Bankruptcy rules require that car loans taken out within 2 ½ years of the bankruptcy filing must be paid off as agreed.
Chapter 7 Redemption
Cramming down is not permitted under Chapter 7 bankruptcy (or ‘straight bankruptcy’). But, Chapter 7 debtors are allowed to ‘redeem’ personal property under 11 USC §722.
11 USC §722 provides 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 exempt under section 522 of this title.” has been released or relinquished under section 554. of this title, to the holder of such lien by paying to such holder the amount of the secured claim allowed to him which is fully secured by such lien at the time of redemption. add
Redemption, however, can be difficult under Chapter 7 because the debtor must make a lump sum cash advance in an amount sufficient to pay off the secured portion of the auto loan, as measured by the fair market value of the vehicle, when the debtor wishes to redeem. Is the vehicle. Chapter 7 does not allow restructuring of the loan, but sometimes the auto lender will accept payments over time, but usually within the short term.
conclusion
If your vehicle is worth less than what you owe, bankruptcy options can be beneficial for keeping your vehicle and moving toward better financial health.
Chapter 13 can reduce or ‘reduce’ your loan balance and interest rates thereby reducing your auto payments to make it affordable. Chapter 13 enables you to reorganize past due auto payments and spread them out over the duration of the Chapter 13 plan so that you can catch past due payments within your personal financial means.
Chapter 7 bankruptcy does not accommodate restructuring of debt repayment, but the §722 redemption provisions allow debtors to purchase their vehicles from bankruptcy for the fair market value of the vehicle, the unsecured portion of the debt issued under Chapter 7 bankruptcy. except.
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