If your car is worth less than the amount you still owe on a loan that you received more than 2 years and 8 months ago, it may be possible for you to “cram down” or “strip down” the lien on your car to the present value of your car. In addition, if you file Chapter 13, you can reduce the interest rate on the loan and extend the repayment term.
For example, let’s say that you still owe $13,000 on the loan with a current interest rate of 15%, but the car is only worth $7,000. In a Chapter 13 case, you could reduce the value of the lien to $7,000, stretch out your repayment term to 60 months, reduce your interest rate to anywhere from 3 to 5%, and treat the remainder of the debt owed as being unsecured. In a Chapter 7 case, if you would pay the lender the full $7,000, it would have to release its lien and the balance due would be discharged.
This is all made possible by the Bankruptcy Code under 11 U.S.C. § 506. Under § 506, a debtor can reduce an undersecured creditor’s secured claim to the value of its collateral. In addition under Till v. SCS Credit Corp., 541 U.S. 465 (2004), the court may also reduce the interest rate on the loan. However, the ability to cram down has significant limitations under 11 U.S.C. § 1325(a)(9):
• The lender must have a purchase money security interest in the collateral that is the subject
of the claim. This means that you must have used the loan to purchase the car; and
• The debt was incurred more than 910 days before you filed the bankruptcy case; and
• The collateral must be a motor vehicle; and
• The motor vehicle must be acquired for the Debtor’s personal use.
As for interest rates, the Till rate is set based upon the current prime rate, adjusted upward to account for the additional risk of non-payment posed by lending to a bankrupt debtor. As the Supreme Court stated, “the appropriate size of that risk adjustment depends, of course, on such factors as the circumstances of the estate, the nature of the security and the duration and feasibility of the reorganization plan.” Id. at 479. In Maryland, the interest rate set by the courts on a car loan is typically between 3-5%.
The offices of Laura Margulies & Associates, LLC has assisted thousands of clients through the Chapter 13 and Chapter 7 bankruptcy process, including the process of cramming down car loans and secured loans on other personal property. Please call us for a consultation today. Laura Margulies is a principal and Fred Nix is an associate in the law firm of Laura Margulies & Associates, LLC. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia. To learn more about our firm visit our web site at www.law-margulies.com.