If your vehicle has negative equity and you’re in a Chapter 13 bankruptcy, then you may be able to cram down your car’s loan and save money. Here’s how it works.
Negative Equity and Chapter 13 Bankruptcy
When you file for Chapter 13 bankruptcy, you work with your trustee to figure out a payment plan over a three- or five-year period, depending on your situation. Chapter 13 is often called the reorganization bankruptcy, since you’re reorganizing your finances instead of liquidating your assets like in a Chapter 7 bankruptcy.
If your vehicle has negative equity, meaning you owe more than its value is, a cramdown decreases what you owe to the car’s value. The negative equity gets added to your unsecured debts, and at the end of Chapter 13, any remaining unpaid unsecured debts are discharged.
To illustrate how a cramdown works, say you’re financing a truck and your remaining loan balance is $10,000. But, the truck is only worth $6,000. The cramdown process would put that $4,000 in negative equity into your unsecured debts, and you’d be paying for the $6,000 in your Chapter 13 repayment plan.
On top of lowering the amount you owe, the legal website Nolo.com states that the law allows you to lower your interest rate. In most cases, your auto loan’s interest rate is lowered to the prime rate plus a little extra, and most times, it's lower than what you originally financed for.
A cramdown essentially asks that you only repay the replacement value of your vehicle, and it can help you lower your interest rate, which saves you more money on interest charges.
How to Qualify for a Car Loan Cramdown
The biggest requirement of a cramdown is that your car has negative equity. If your vehicle’s value is equal to the loan amount, or you owe less than the car’s value, you won’t be able to cram down your auto loan.
Other requirements include:
- You purchased the vehicle at least 910 days prior to filing the bankruptcy.
- Future payments and back payments (if applicable) are included in your repayment plan.
There aren’t a lot of requirements for a cramdown, but if you don’t think your car is going to qualify, it may be time to get out of the negative equity position and into another vehicle.
Get an Auto Loan After Bankruptcy
If you’ve determined that you need another car while you’re in Chapter 13 bankruptcy, then you’re likely to need to work with a subprime auto lender. Many traditional lenders are hesitant to assist a borrower in an open bankruptcy, or even one that was recently discharged.
After you’re discharged from Chapter 13 bankruptcy, you can usually get into a car loan pretty easily. Bankruptcy auto lenders can typically work through the damage that bankruptcy causes on your credit score.
Finding the right lender for your credit situation is key in getting a car loan approval. Here at Drivers Lane, we know where bad credit auto lenders are, and we want to match you to a dealership with these options for free. Complete our secure car loan request form right now to get started.