Facing repossession? Paying an outrageous interest rate? Bankruptcy can halt repossession and allow you to significantly modify your car loan.
3 Benefits – Modify Your Car Loan in Chapter 13:
1. Lower Interest Rate
Chapter 13 allows you to modify your car loan often by substantially reducing your interest rate. As of the drafting of this article, borrowers could reduce the interest rates to about 4.8%. Here’s an example how much less you’d pay in interest on a $20,000 vehicle loan:
- 18% over a 5 year term = $508/mo.; total interest paid: $10,472
- 4.8% over a 5 year term = $376/mo., total interest paid: $2,535
You probably noticed the difference in total interest paid, right? It’s huge! This change in interest rates saves you almost $8,000. For those high interest (anything over 6% or 7%), bankruptcy can save a ton in interest.
2. More Time To Repay
In Chapter 13, you will be able to stretch out repayment of your vehicle loan as long as 5 years. That can substantially reduce your monthly payment amount.
3. Reducing Balance Owed (i.e. the “Cramdown”)
If you owe more than the car is worth, you may be able reduce the amount of the loan. In certain instances, you can reduce the loan balance to the true fair market value of the car. (Note: this “cramdown” is only available in chapter 13; not chapter 7 ). Given that most people are “upside down” on their vehicle loans cars, this can hold real value for many.
Think Chapter 13 Might Benefit You?
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How Do I Know If I Can Reduce the Balance Owed?
The Two Critical Limitations:
- If you cram down on your vehicle debt, you will need to complete your chapter 13 plan payments over the full chapter 13 plan period. It is only upon successful completion of your chapter 13 plan that the reduction in principal becomes final. In essence, you’ve struck a bargain with the court – if you complete your promised chapter 13 plan payments, then you receive the full benefit of the cramdown.
- If you acquired the vehicle within 910 days (2.5 years) of your chapter 13 filing, you cannot cram down on the debt. This is simply a restriction under the law. But you can still modify the interest rate and extend the term of your loan. It is only the cramdown on the loan amount which is restricted by this 910-day rule.
And How Do I Know Fair Market Value?
In most instances, the value of the car is determined through one of the typical vehicle valuation sources, such as Kelley Bluebook. If the “bluebook” value of your 2010 Honda Accord (for example) is 13,000, and the outstanding loan is $16,000, the unsecured portion of the loan would be $3,000. If you otherwise qualify, this is the amount that could be stripped from the amount owed.
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