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What’s a Vehicle Loan Cram Down, and Can I Do It?

Sept. 16, 2011

If you have a loan against your vehicle, and this is a vehicle you want to keep, you definitely want to know whether you qualify for a cram down.

A cram down on your vehicle loan could allow you to keep your vehicle while paying thousands of dollars less for it, often while also reducing the monthly payments on the loan. The term comes from the basic concept that you are essentially allowed to pay for the value of the vehicle instead of the contract balance, assuming that the vehicle is worth less than the balance. You “cram down” the debt to the value of the vehicle. But how much you actually save altogether, and how much you save each month, depends on the facts of the case. Don’t worry; we won’t leave you hanging. We’ll explain in a moment, so you’ll be able to at least get some idea how much money a cram down might save you.

But we don’t want you to get all excited about it if you don’t qualify. And the rules for qualifying are—for a change—really straightforward.

Vehicle cram downs apply only in Chapter 13. There’s no such thing in Chapter 7. If you have your heart set on a straight Chapter 7—a get-your-debts-discharged-in-three-months bankruptcy, don’t even think about a cram down on that vehicle loan. In Chapter 7, it’s take it or leave it. Keep that vehicle and sign on for the rest of the full loan, or surrender it and (almost always) owe nothing. Only Chapter 13, the pay-for-three-to-five-years bankruptcy, lets you keep your vehicle and not pay the full loan balance.

That is, you get a cram down if you also meet the second condition: the vehicle loan was originated more than 910 days (about two and a half years) before you file the Chapter 13 case. If your vehicle loan is not that old, no cram down.

So let’s assume you qualify—you’re in a Chapter 13 case with a vehicle loan that’s old enough. How much money are you going to save with a cram down?

The first part of the answer is pretty easy. We mentioned it above—the new cram down amount you would pay is the fair market value of the vehicle. Your savings is the difference between that value and your contractual loan balance. Of course the value of any vehicle can be open to some dispute, but that’s usually resolved with some simple negotiations. There’s usually not enough money in it to waste everybody’s attorney fees on litigating this.

Then calculating the amount of the new monthly payment on that new reduced balance is a matter of simple math. We re-amortize the loan, meaning we calculate what payments are needed to pay off the new value-based balance within the life of the Chapter 13 Plan. The cool thing is that often not only is the balance to be paid reduced, the length of the remaining term of the loan can be stretched longer than it would have been under the contract, and often the interest rate is reduced, all potentially greatly reducing the new monthly payment.

The last part of the “how much do I save question?” is the tricky part. The part of the loan balance that isn’t being paid—the amount beyond the value of the vehicle—is treated like an unsecured debt. That means it is lumped in with the rest of those bottom-of-the-barrel debts, which are all paid however much your Chapter 13 Plan says those debts get paid. Sometimes that pool of unsecured debts is paid a little, sometimes a lot, sometimes it is paid nothing, sometimes (rarely) it is paid in full. It depends on your whole financial picture–your income and expenses, assets and debts—and how that all interrelates with all the rules of Chapter 13 as applied to your case. Hint—in most Chapter 13 cases with a vehicle cram down, the unsecured portion of the vehicle loan gets paid little or nothing.

A Chapter 13 vehicle cram down is usually a very good deal, if you qualify for it.