Keeping A Car In a Chapter 13 Bankruptcy Case: The Cram Down

Let’s get technical for a moment. § 1322(b)(1) of the Bankruptcy Code, Title 11 reads that a Chapter 13 plan of repayment “may modify the right of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence…”

So what does this mean in simpler terms? The terms of a motor vehicle contract, under certain circumstances, may be changed by a Chapter 13 plan. What changes may be made? Instead of the true balance of the loan, the value of the vehicle as collateral is used as the new balance for repayment of the loan. Thus, the cram down of a motor vehicle loan modifies key contract terms by reducing the loan balance based on the collateral’s value, as well as lowering the interest rate and decreasing the term of the car loan to fit within the Chapter 13 plan of repayment.

What type of property may “crammed down?” Debtors in Chapter 13 bankruptcy cases may cram down an automobile loan, investment property mortgages, or other loans for items of personal property such as household goods, electronics, and furniture. However, federal law in Bankruptcy Code § 1322 Code clearly states that a chapter 13 debtor may not use a cram down procedure to modify a loan on a home or principal place of residence.

There is an important requirement to cramming down a motor vehicle loan. The motor vehicle must have been purchased at least 910 days prior to the bankruptcy case’s filing date.

How does a cram down work? If a car is worth $10,000 and the underlying loan balance is $25,000, then a debtor may cram down the loan to $10,000 in a Chapter 13 repayment plan provided that the debtor bought the motor vehicle more than 910 days before the filing of the case. The debtor will theoretically save $15,000 of the balance of the loan as it will be included with other unsecured debts in the bankruptcy case. How much of this debt is paid depends upon the results of the means test and approved provisions of the debtor’s plan of repayment. Any portion of this debt that remains rightfully unpaid will be discharged at the completion of the Chapter 13 plan and issuance of a discharge order by the court. At this time, the debtor owns the motor vehicle free and clear.

If you are facing debt problems, bankruptcy may be a viable solution. If you have owned your car for more than 2 1/2 years, and the value of your car is well below the balance of the underlying motor vehicle loan, bankruptcy may offer many benefits. The experienced Sacramento metropolitan area/Northern California defense attorneys at the Montefalcon Law Offices are here to help you if your financial position necessitates the consideration of a bankruptcy case filing under Chapter 7, 11, or 13. Contact us online or schedule a consultation at any of our three conveniently located offices. Telephone our downtown Sacramento office at (916) 444-0440, our South Sacramento office at (916) 399-9944, or our Concord office at (925) 222-5929.