You have heard filing for Chapter 13 bankruptcy can help lower the interest rate on your car loan or reduce your balance but how?
Before diving into how chapter 13 bankruptcy can lower your car loan interest rate or balance, let us first explain how a car loan is handled in Chapters 7 and 13. Chapter 7 is also called liquidation bankruptcy. The trustee assigned to your case will liquidate some of your assets and use the sale proceeds to repay your debt. In contrast, in Chapter 13, bankruptcy, also referred to as "wage earner," is a type of bankruptcy that reorganizes all your outstanding debts to make it easier for you to repay some of your debts over a predetermined period depending on your income.
Car Loan in Chapter 7 Bankruptcy
When you file for Chapter 7 bankruptcy, you do not enjoy debt reorganization. Here is a case scenario. If you have an outstanding car loan and file for Chapter 7 bankruptcy, the car loan will be a non-dischargeable debt because it is secured. Your secured creditor also possesses your car loan. So, they will have you sign an affirmative agreement to relinquish the discharge of debt in your bankruptcy case. Signing this agreement is the only way to retain ownership of your vehicle. You will need to keep up with your car loan payments, or else your creditor can repossess it at any time.
If you would still like to file for Chapter 7 bankruptcy, there is one way you can lower your car balance by redeeming your ownership of the vehicle. If you can pay an amount equal to the car's replacement value, you can redeem your rights and decrease your car loan balance. However, you will need to make the payment as a lump sum, which can be hard, especially since you are filing for bankruptcy. So, let us see how Chapter 13 can help
New Interest Rates in Chapter 13
Filing Chapter 13 bankruptcy can help lower your car loan payment. Your car loan will be included in your bankruptcy payment plan, and your trustee will continue paying your car loan alongside other loans. Usually, in most Chapter 13 cases, the car loan remains the same, but the interest rate will decrease. You might also reduce the outstanding principal balance on your car long, but only if the;
· Current value of the car is less than the balance you owe
· Car was bought 910 days or more before filing for bankruptcy
How Much Interest Can I Save on My Car Loan if I File for Chapter 13?
It depends. Let us use this illustration. You bought a car on loan and currently owe $20,000, paying a 19% interest rate on the loan, and have 48 months remaining. If you continued making your payments, you would have paid interest amounting to $8,704.
On the other hand, if you file for bankruptcy, add the car loan to your chapter 13 payment plan, and get charged a 4% interest rate on your car loan, you will only pay $1,676 as interest. So, you would be saving more than $7,000 in this case.
Two Ways You Can Lower Your Car Balance in Chapter 13
We had earlier mentioned a cram-down. A cram-down is a bankruptcy option debtors can get to lower their car payments. Cram-down is when the court orders a creditor to accept different loan terms for a debtor in bankruptcy. It is used in Chapter 13 bankruptcy proceedings to help lower secured debt, which a debtor continues to repay.
Assuming you bought a vehicle worth $50,000 with the car loan and fell behind on payments, the interest will accumulate, increasing the value of the loan. A cramdown will help lower the car debt from above $50,000 down to $50,000. However, it is only specific to car loans and cannot be used to lower mortgages.
You can only lower the car balance for a car you bought 910 days or more before filing for bankruptcy. This is stipulated in the 910-day rule, which states the debtor needs to have the loan for 910 days before filing for Chapter 13 bankruptcy. 910 days are around two and a half years. This rule ensures debtors do not purposely buy new cars with the hope of lowering the car balance by filing bankruptcy. Therefore, if you don't pass the 910-day rule, you cannot cram down your loan and won't be as lucky to reduce your payments.
Cramdown is only available in Choate 13 bankruptcy. You will need to file an "adjustment of debt" in Chapter 13 bankruptcy. You will get a payment plan for your debts, which could take three to five years to complete. When listing your debt, you will need to show the current value of your car to indicate the secured part of the car loan balance. It will also indicate the unsecured part and how much to pay towards the loan.