When Delaying Bankruptcy May Help Reduce Your Car Loan

Delaying your bankruptcy filing might help you reduce your car loan in Chapter 13 bankruptcy.

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If you satisfy certain requirements (including a timing restriction), you may be able to reduce your car loan balance in Chapter 13 bankruptcy. This is referred to as a car loan cramdown. In some cases, delaying your bankruptcy can help you reduce your car loan because whether you are eligible for a cramdown depends on:

  • when you purchased the car, and
  • the date of your bankruptcy filing.

How Does a Car Loan Cramdown Work?

In most cases, your car’s value decreases quicker than your loan balance. If your car is worth less than what you owe on it, you can cram down your loan balance to the value of the car through your Chapter 13 repayment plan.

In a cramdown, your car loan is essentially split into two separate categories (secured and unsecured) in your Chapter 13 plan. The secured portion (equal to the value of the car) gets paid in full. The unsecured portion (the loan balance above your car’s value) may be paid nothing or pennies on the dollar depending on the terms of your plan. (For details, see Reducing Car Loan Debt With a Cramdown.)

When you complete your plan, any remaining unsecured amount is wiped out by your discharge. However, before you can reduce your car loan balance, you must satisfy certain timing restrictions.

Delaying Your Bankruptcy Can Help You Cram Down Your Car Loan

In order to take advantage of a car loan cramdown, you must have purchased your car at least 910 days (approximately two and a half years) prior to filing for bankruptcy. Basically, Chapter 13 bankruptcy doesn’t allow you to reduce your loan balance on a car you recently bought. This means that, depending on when you bought your car, you may have to delay your bankruptcy filing to satisfy the 910-day rule if you want to reduce your car loan.

Example. Sasha purchased her car on January 1, 2006. At that time, she took out a $30,000 loan to buy the car. Now it is January 15, 2008 (about two years later) and Sasha is contemplating filing for Chapter 13 bankruptcy. There is still $24,000 left on her car loan. However, her car has depreciated in value to $18,000. If Sasha files for Chapter 13 bankruptcy now, she will have to pay off the entire remaining balance of $24,000 (as part of her repayment plan or outside of bankruptcy) if she wants to keep her car. However, if she simply delays her bankruptcy for approximately six months, her filing date will be more than 910 days after she bought the car. As a result, she can reduce her loan balance and pay her lender only $18,000 in her plan (assuming a zero dividend to unsecured creditors) and own the car free and clear after her bankruptcy.

For more articles on how your car and car loan are treated in Chapter 13, see Your Car in Chapter 13 Bankruptcy. To find out how other issues affect when you should file for bankruptcy, see Timing Your Bankruptcy Filing.

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