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Don’t Surrender Your Vehicle or Let it Get Repossessed Before Talking with a Bankruptcy Attorney

Dec. 24, 2011

You may figure that with a vehicle loan it’s a take-it-or-leave it proposition—that in bankruptcy you either keep the car and keep on making payments on it, or you surrender it and get to write off any unpaid balance. The above is generally true, in a “straight” Chapter 7 bankruptcy.

But, in a Chapter 13 case you may be able to keep a vehicle you thought you couldn’t afford to pay for. Under certain conditions, you could pay less each month AND pay less over time, and at the end still own the vehicle free and clear.

Hanging onto a vehicle that you desperately need, but can’t afford the monthly payments on, puts you into a dreadful predicament. This is especially true if you have already fallen behind, and are worrying about your vehicle disappearing courtesy of the repo man. You know the contract requires you to make the payments or you lose the vehicle. You might even be trying to find a cheap replacement vehicle, talking to friends or relatives, but really worried sick about getting an unreliable vehicle. On the other hand, a part of you might also be looking forward to letting go of the vehicle you really can’t afford. That’s especially true if the vehicle is worth less than the loan balance.

But what if you could reduce what you have to pay for the vehicle down to fair market value? And lower the payments to an amount you could afford, while at the same time reducing or eliminating what you have to pay to your other creditors? We call that a “cramdown.”

You can do a vehicle loan cramdown in a Chapter 13 case if you meet two main conditions:

1) you got your vehicle loan more than 910 days before the Chapter 13 case is filed (that’s just about two and a half years); and

2) at the time your Chapter 13 is filed, your vehicle is worth less than the balance on your loan.

If your vehicle loan meets these two conditions, we can essentially re-write your loan. We can reduce the total amount you must pay down to the value of the vehicle, “cramming it down” to that lower amount. That’s called the “secured portion” of the debt. We then calculate a new monthly payment—the payment amount needed to pay off that smaller balance, sometimes at a lower interest rate than the contract rate, and often on a longer remaining term, which often results in a radically reduced monthly payment. You pay that each month as part of your Chapter 13 Plan.

So what happens to the “unsecured portion” of the debt—the part beyond the value of the vehicle? It gets lumped in with the rest of your unsecured debts. How much that part gets paid depends on everything else going on in your case. But in many situations, you do not need to pay anything more to your unsecured creditors as a result of your vehicle loan cramdown. The same amount you would otherwise pay to your unsecured creditors—if you are required to pay anything at all—would just get divvied up among them differently.

One more sweet twist: if you’re behind on your vehicle loan at the time you file your Chapter 13 case, you don’t have to catch up on that arrearage. It’s just part of new reduced “crammed down” obligation. You just make your new Plan payments, and not need to worry about scraping up the missed payment.

As you can see, before you surrender a vehicle or allow it to be repossessed, you need to see if you qualify for a cramdown. If you do, and we show you what the monthly payment would be reduced to, and how much less you would be paying for the vehicle over time, THEN you can make an informed decision about whether this cramdown makes it possible and worthwhile to keep that vehicle.