Do you absolutely need to keep your vehicle, but can’t afford the monthly payments? See if you qualify for a “cramdown.”
In our last blog we talked about stopping your vehicle from being repossessed, and then bringing it current and keeping it through a Chapter 7 “straight bankruptcy.” But what if you can’t afford the regular payments? What if you have no way to bring it current quickly? What if you have special obligations, like recent income taxes or back child support, which would not be discharged (legally written off) in a Chapter 7 case and so make it impossible to afford your vehicle payment?
These problems could all be solved if your vehicle loan qualifies for a “cramdown,” and if you qualify to file a Chapter 13 case. If so, you may be able to reduce the vehicle loan’s monthly payment—often significantly—reduce the interest rate, and reduce the total amount being paid for the vehicle.
Here’s how it works.
The Example
Henry and Alison, a married couple in their mid-30s, have two vehicles. One is free-and-clear and continues to be reliable. Their second vehicle, driven mostly by Alison, was bought new four years ago soon after they were married. Their jobs are located in opposite directions from their home, where there is no public transportation, so they need to keep both vehicles. Their income has recently become stable, but because of gaps in employment during the last couple years and Henry’s stint of self-employment, they’ve had trouble keeping up on their debt payments, including on Alison’s car.
Between the two of them, they owe:
- $30,000 in “general unsecured” debts—credit cards, medical bills, a payday loan. The credit card payments are all late, so that the “penalty” interest rates have shot through the roof. The medical bills have all been sent to collections, with threats of upcoming lawsuits. The payday loan creditor just filed a small claims suit against them.
- $8,000 in 2010 and 2011 federal income taxes from Henry’s ill-fated attempt at self-employment—he did not pay quarterly estimated taxes because there just wasn’t enough money to pay urgent bills. Interest and penalties are accruing. The IRS is pressing them to start making payments, but with all the other pressures they don’t see how they can.
- $10,000 on Allison’s car, with regular monthly payments of $457, at 9% interest, with 24 more months to pay on it. After 4 years, the vehicle is now worth about $6,000. They are about to be two months behind ($914) on that car, and see no way to come up with that money.
Henry and Alison make enough to pay their necessary living expenses plus about $500. They don’t see how they can keep Alison’s car, ever pay the taxes, or deal with the pending lawsuit and other creditors.
The Great News
Henry and Alison go to a competent bankruptcy attorney. They find out that with a Chapter 13 “cramdown” of the vehicle loan, they can save the car without having to pay the missed payments, they can pay off the taxes without paying a dime of additional interest and penalties, and can get rid of most of their other debts, all by paying $500 per month for the next 36 months. At the end of that time they would own Alison’s vehicle free-and-clear, would owe no taxes, and be otherwise totally debt-free.
How This Is Possible
Henry and Alison’s four year old vehicle loan qualifies for “cramdown” because it is at least 910 days old (about 2 and half years). This allows them to rewrite their now $10,000 loan, dividing it into secured and unsecured portions. The secured portion, based on the $6,000 current value of the vehicle, they must pay in full, but usually with lower monthly payments and lower interest. The unsecured portion, the remaining $4,000, they only pay to the same extent that their other unsecured creditors are being paid, which is often not very much.
Assume that the interest rate is reduced from 9% to 5%, so to pay off the $6,000 secured portion over 36 months would cost only about $180 per month.
That’s certainly better than the $457 regular payment. And without them having to catch up on any part of their missed payments either!
The Rest of the Chapter 13 Plan
With a $500 monthly Chapter 13 plan payment, $180 of which is going to pay the secured portion of the vehicle loan, that leaves $320 per month—for 36 months—to pay the taxes and everybody else, or $11,520 beyond the car payment. With $8,000 of that going to pay off the income taxes (and no more because of no additional interest and penalties), that leaves $3,520. Most of that would likely go to the Chapter 13 trustee fees (usually less than 10% of the total paid) and your attorney’s fees (to the extent not paid up front). This would leave little or maybe even nothing for the unsecured creditors. (Some jurisdictions may have certain minimums how much those unsecured creditors must be paid.)
The Bottom Line
Henry and Alison go from a seemingly hopeless situation, where their car is about to be repossessed, their wages about to be garnished, and with no idea how to pay an increasing tax debt, to a solution to all their problems. They pay thousands of dollars less on their car while keeping it, pay less on their taxes while paying it off without pressure, and tens of thousands of dollars less on their other debts while protected from lawsuits. They avoid repossession, garnishment, and IRS tax collection, and become totally debt-free in three years.