One question most people ask before filing bankruptcy is what will happen to their cars. They want to make sure they will not lose their primary means of transportation, especially if they commute to work, live someplace without public transportation, or have kids or elderly family members who depend on them.
The good news: many people are able to keep a car in bankruptcy. Most debtors are able to exempt the equity in their vehicles and maintain possession of them. More good news: if you are upside down on your vehicle, that is, you owe more than it is worth, you may be able to reduce the amount owed through Chapter 13 bankruptcy. This procedure is known as cramming down a vehicle. A Morris County bankruptcy attorney can review your case and explain your vehicle options in both Chapter 13 and Chapter 7 bankruptcy, including whether you are eligible for a vehicle cramdown.
How a Cramdown Works
To help people obtain a fresh start, federal bankruptcy law permits Chapter 13 debtors to cram down a vehicle if certain conditions are met. Cramming down a vehicle means the debtor is allowed to pay the fair market value of the vehicle instead of the total amount owed. For example, if you owe $15,000 on your vehicle but it is only worth $10,000, so long as certain conditions are met, you can cram down the debt to $10,000 and the loan will still be considered satisfied in full — the remaining $5,000 of debt is treated as general unsecured debt, like credit cards.
You may be able to cram down your vehicle if:
- It’s for personal use
- You owe more than the fair market value
- You incurred the debt at least 910 days, or about two and half years, before you filed bankruptcy (known as the 910-day rule)
Vehicle cramdown can be a valuable tool for people who are seeking debt relief through Chapter 13 bankruptcy. Although Chapter 7 debtors cannot cram down a vehicle, they do have other options for dealing with car loans, including reaffirmation, redemption, or surrendering the vehicle and discharging the deficiency balance.
Process for Cramming Down a Vehicle
All Chapter 13 debtors file a plan of reorganization with the bankruptcy court. In that plan, you will propose to pay either the full car claim or, if cramdown is an option, the value of the vehicle. The car creditor has the right to object to the value proposed in your plan, and your plan must be approved by the court. Therefore, cramming down a vehicle often involves negotiations with the car creditor and may even require a hearing, making it important to work with a qualified Morris County bankruptcy lawyer.