By: J. Cale Rogers
Coleman & Chambers, LLP
This article is intended for educational purposes only and is not intended to provide legal advice.
Is your car worth less than what is owed on it? Chapter 13 can help.
One of the advantages of a Chapter 13 Bankruptcy is that the code provides debtors, in certain circumstances, with the right to modify existing loan agreements with certain creditors. Though a debtor doesn't have the same right with respect to a residential mortgage loan, a debtor can often times modify the car lender's rights through a process known as a "Cram Down."
What is a Cram Down?
A cram down is where the secured debt for an automobile is deemed to be the fair market value of the automobile (which can be easily established by Blue Book values). This is possible where the value of the automobile is worth less than the amount owed to the creditor. When a debtor qualifies for a cram down, the secured amount is the fair market value of the car, and the difference between the payoff pursuant to the loan agreement and the secured amount is deemed unsecured debt and is treated as other unsecured debt pursuant to the debtor's Chapter 13 Plan.
So, if a debtor owes $15,000 on a car and files Chapter 13 bankruptcy, but the car is only worth $10,000 at that time, the debtor's Chapter 13 plan will pay off the secured claim of $10,000 entirely and the remaining $5,000 balance will be treated as unsecured. The specifics of the debtor's unsecured pool and the debtor's income will determine what amount, if any, of the now-unsecured portion of the automobile loan must be repaid.
What Qualifies A Chapter 13 Bankruptcy for a Cram Down?
Please note that a cram down is not available in every chapter 13 case. To qualify for a cram down, the loan must have been entered into more than 910 days prior to the filing of the case if the vehicle is for the personal use of the debtor. 11 U.S.C. Sec. 1325.
In addition to changing the loan amount, a Chapter 13 debtor can also change the interest rate. This is generally true whether or not the debt qualifies for a cram down. The debtor can generally get away with proposing an interest rate lower than what they are paying (the "Till" interest rate is prime plus a risk factor, generally anywhere from 1.5%-to-3.0%). Additionally, another advantage of a Chapter 13 allows you to extend your car loan out over the course of your Chapter 13 Pan (usually either 3 or 5 years), even if it is scheduled to be paid off sooner. This often results in a lower monthly payment for Chapter 13 debtors.
Although the procedure will vary by district, in many districts, including the Northern District of Georgia, if a debtor proposes a cram down, is becomes the obligation of the lender to object to either the fair market value or interest rate the debtor has proposed. If the creditor objects, the debtor may be able to settle with the creditor, or allow the judge to decide.
Please call Coleman, Chambers, Rogers & Williams, LLP to talk to an experienced Gainesville, GA bankruptcy attorney today. We offer low down payments to assist our clients through a Chapter 13 filing.
About the author: Cale Rogers is a partner and attorney with Coleman, Chambers, Rogers & Williams, LLP, in Gainesville, Georgia. The law firm of Coleman, Chambers, Rogers & Williams, LLP regularly handles matters in Bankruptcy Court in the Northern District of Georgia. The firm can handle Chapter 7 and Chapter 13 filings for qualifying debtors in almost all North Georgia counties including: Hall County (Gainesville), White County (Cleveland), Lumpkin County (Dahlonega), Gwinnett County (Lawrenceville), Dawson County (Dawsonville), Habersham County (Demorest, Cornelia) all of Northeast Georgia, and throughout the State of Georgia.
"We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code."