Upside Down On Car Loan – Chapter 13 Cram Down Provisions and Chapter 7 Redemption

Customers often need debt relief because of a failed car loan.

Modern society requires owning and maintaining a car, which sometimes turns into a devastating financial burden. Lenders are quick to finance vehicles, knowing that borrowers prioritize car transportation over most other financial obligations. Even borrowers with poor credit are framed in auto financing packages priced at high interest rates to compensate aggressive lenders for the added risk.

Financial problems often stem from car financing. The lucky car buyer drives his new car almost 100% financed from the lot. As the saying goes, the new vehicle drops in value by several thousand dollars almost immediately afterward before it even hits the highway.

Auto transportation costs $4,000.00 to $6,000.00 per year, which includes payments for auto loans, liability and collision insurance, repairs and maintenance, and gasoline.

Havoc begins when an unexpected out-of-warranty auto repair, or motor vehicle accident, unexpectedly and substantially lowers the value of the vehicle well below the outstanding loan balance owed to the bank. Or, perhaps more innocently, in a new car trade-in where enthusiastic car salesmen and lenders agree to trade in your old car and put the remaining outstanding balance of your old car loan (for a slightly higher payment) on the back end of your new car loan leaving the new car buyer significantly ‘upside down’ when purchasing a new car.

These situations put the borrower in a predicament where significant portions of the income are spent on covering an unsecured car debt that has no use in supporting the family’s modest living expenses.

Under certain circumstances, relief from these devastating financial problems can be obtained through a bankruptcy filing.


Under Chapter 13 of the United States Bankruptcy Code, debtors are allowed to “Cram Down” the unsecured portion of their auto loans to the fair market value of the vehicle securing the loan. This requires debtors to pay back only the secured portion of the car loan, but the unsecured balance is treated as general unsecured creditors that provide the debtor with significant benefit, allowing the debtor to pay only a small portion of the unsecured portion of the car loan. that is due.

As an example, let’s assume our debtor owns a car worth $10,000.00 and there is a car loan with a payout balance of $20,000.00. In this scenario, the loan is only partially secured. The car borrower is only insured for the value of the vehicle or $10,000.00. The remaining $10,000.00 balance on the loan is unsecured. In this situation, bankruptcy law gives the debtor the right to take out the unsecured portion of the car loan and treat that portion of the loan as unsecured. So if General Unsecured Creditors only received a 20% dividend, the car borrower would only receive $2,000.00 on their unsecured portion of the car loan.

These situations become sticky between debtor and lender as disagreements often arise over the correct value of the vehicle. Your bankruptcy attorney must negotiate a valuation settlement before the debtor’s Chapter 13 plan is confirmed.

The valuation takes place in accordance with the provisions of the United States Bankruptcy Code, in particular 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 7 or 13, the value in respect of personal property securing a recognized claim shall be determined by reference to the replacement value of such property from the date of filing of the petition without deduction for costs of sales or marketing.In relation to property acquired for personal, family or household purposes, replacement value means the price a retailer would ask for that type of property, taking into account the age and condition of the property at the time the value is determined. determined” added

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The Cram Down provision under the bankruptcy law also provides for a reduction in the interest rate on the car loan. Oftentimes, debtors find themselves paying out huge automatic payments that are used to cover exorbitant interest rates that car borrowers often charge high-risk borrowers.

An interesting exception was enacted under the 2005 amendments to the U.S. bankruptcy law that prohibit cram-downs where the car loan for purchase money arose within 910 days (2 ½ years) of the Chapter 13 bankruptcy filing date [see 11 U.S.C §1325(a)(9)]. Debtors must consider the timing of a Chapter 13 filing if they want to escape the burden of a troublesome car loan debt. Bankruptcy rules require auto loans taken out within 2 ½ years of filing for bankruptcy to be paid as agreed.


Cram downs are not allowed under Chapter 7 bankruptcy (or “outright bankruptcy”). But Chapter 7 debtors are allowed to “redeem” personal property under 11 USC §722.

11 USC §722 provides the following:

“An individual debtor may release … tangible personal property primarily intended for personal, family or household use from a lien securing a consumer debt which is redeemable, if such property is exempt under Section 522 of this Title or left under Section 554 of this Title, pay the holder of such lien the amount of such holder’s permitted secured claim which is fully secured by such lien at the time of redemption.” emphasis added

However, repayment can be difficult under Chapter 7 because debtors must pay a full cash amount upfront, an amount sufficient to pay the secured portion of the car loan, as measured by the fair market value of the vehicle at the time the debtor tries to pay off. the car. Chapter 7 does not allow loan restructuring, but sometimes the car borrower will accept payments over time, but usually short term.


If your vehicle is worth less than you owe on it, bankruptcy options can be beneficial to allow you to keep your vehicle and move towards better financial health.

Chapter 13 can reduce or “reduce” your loan balance and interest rates, lowering your automatic payment, making it affordable. Chapter 13 also allows you to restructure and spread overdue automatic payments over the life of the Chapter 13 plan so that you can afford to catch up on the delinquent payments within your personal financial means.

Chapter 7 bankruptcy does not allow restructuring of loan repayments, but the §722 amortization provisions allow debtors to purchase their vehicles out of bankruptcy for the fair market value of the vehicle, forgiving the unsecured portion of the debt under the chapter 7 bankruptcy.