Sacramento Bankruptcy Attorney serving Elk Grove discusses how Chapter 13 bankruptcy relief may impact people with car loans.

One of the advantages filing a Chapter 13 bankruptcy is that, under qualified plans, you’ll be able to keep your car and pay it off at market value rather than reaffirming the entire loan balance which may be much more than what the car’s worth.  You keep the car, get a break on the total loan amount, and the lender gets paid without having to repossess the car and try to resell it.

Filing Chapter 13 Stops Car Repossession

Whether you’re filing a Chapter 7 or a Chapter 13 bankruptcy petition, your filing places an automatic stay on your creditor’s collection efforts.  In other words, if you have a car loan and have not been able to keep up with the payments, any attempts to repossess your car most stop.

Now that you’ve got some breathing space, what’s the next step?  If you’ve opted to file a Chapter 13 bankruptcy, it means you have enough income left over in your budget to make car payments.  But the amount you’ll pay off on your car loan will depend upon another determination called the 910 day rule.

What’s the 910 day rule?

Basically, the 910 day rule works like this:  if you purchased your car within 910 days (about 2.5 years) of filing your Chapter 13 bankruptcy proceeding, you will have to repay the entire loan.  More precisely this means you will need to pay the full balance due on the loan due on the car, and not the current fair market value.

If you purchased the car more than 910 days before you filed your bankruptcy petition, you are only responsible for paying an amount equal to the present value of the car.  This means that if you owed $16,000.00 on a car but it is only worth $8,000.00, you may only be required to pay the $8,000.00 in your chapter 13 repayment plan.  The other $8,000 becomes an unsecured debt and might only be paid a few pennies on the dollar. This is what is called “cramming down” the loan to $8,000.

“Cramming down” debt: the good, not so good, and downright ugly

The step in keeping your car is to determine its fair market value.  If the market value of your car is less than the principal owed on your auto loan , then you can probably get the judge to lower, or “cram-down,” the remaining balance on your auto loan to reflect the amount of its current market value.  And the current market value, as already illustrated here, can be much lower than the principal amount owed on the loan..

The key to using cram downs and other advantages of a Chapter 13 bankruptcy plans, is a source of income to repay the budgeted amounts within the 3 to 5 year repayment term.  The consistency and sufficiency of income will keep financially stable and you won’t have to miss payments.  But caution:  missing even one proposed repayments can have bad consequences for your bankruptcy – like having to go back to owing the original amounts on those debts you had crammed-down.

By consulting with a bankruptcy attorney you’ll not miss important information that you need in order to have a good result in your bankruptcy.  Please contact our Sacramento bankruptcy law office serving Elk Grove at 916-313-9069 or via email at info@california-bankruptcyattorney.com