Righting the Upside-down Car Loan and Lowering High Interest Rates

If you buy a car with little or no money down, there’s a good chance your loan is upside-down, meaning you owe more than the car is worth, as soon as you drive off the lot. These little or no money down loans are often coupled with high interest rates. It’s not a good position to be in if you have trouble making the payments and want to sell the car. The good news is that Chapter 13 bankruptcy can help right this situation.

If a debtor in bankruptcy purchased a car more than 910 days (2.5 years) prior to filing the bankruptcy case, she can “cramdown” her car loan. This means she can pay the creditor an amount equal to the value of the vehicle, rather than the amount owed on the loan, paying off the vehicle in 36-60 months. The creditor is paid at a discounted rate of interest (currently 5%) through monthly payments to the Chapter 13 Bankruptcy Trustee. At the end of the Chapter 13 Plan, any remaining debt owed on the loan is discharged and the debtor owns the car free and clear.

If the car was purchased less than 910 days (2.5 years) prior to filing the bankruptcy, the “cramdown” option is not available. The creditor must be paid the total amount due on the loan. However, the loan can still be paid at the discounted rate of interest (currently 5%) through monthly payments to the Chapter 13 Bankruptcy Trustee. If a debtor has a high interest rate, this can result in a significant savings.

If a bankruptcy debtor decides it is not wise to keep the car, it also an option to surrender the car to the creditor in Chapter 13 Bankruptcy cases. The creditor will sell the vehicle and apply the sale proceeds to the loan. Any debt remaining is discharged in the bankruptcy case. Surrendering a vehicle is also an option in a Chapter 7 case; however, Chapter 7 does not allow a debtor to cramdown the loan or reduce the interest rate.