Tuesday, January 17, 2012

Cars in Bankruptcy: The Cram Down “910 Car Claim”

       One of the luxuries of the Bankruptcy Code is the ability to Cram Down the amount you pay on your vehicle. The Bankruptcy Code allows you to (1) lower your interest rate to as low as 3.25% instead of keeping it at that 18% interest rate at which you bought your car; and (2) lower the overall payment of your car to its value instead of the balance on the loan. (This also includes Title Loans on your car) There is only 1 caveat. The loan on the car must have been acquired more than 910 days before the filing of the Bankruptcy case. If the loan on your car is less than 910 days, then you will have to pay the full balance on the loan but not the contractual interest rate. Here is an example to illustrate.

       Assume you bought your car 2 and a half years ago for $25,000 at an interest rate of 15%. Your remaining balance on the loan is $12,500, but the value of your car is now $6,000. Well, in the bankruptcy, you are allowed to “Cram Down” the loan to the value of the car and reduce the interest rate to as low as 3.25%. Therefore, you are now paying only $6,000 at 3.25%. Moreover, we can assume that you only had 2 years left to pay on balance of the loan according to its terms, but through bankruptcy you also get to extend the loan to another 3 or 5 years which would make your payments considerably lower. Under the original terms, the monthly payments would be $695.77. But under the Cram Down, the payments would be $108.48 if extended out by 5 years.

       It must also be noted that the 3.25% is a general rate that has been established for the Middle District of Tennessee, other districts and circuits may have different standards.

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