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Bankruptcy Law Allows Filers to 'Cram Down' Auto Loans to Fair Market Value

October 15, 2010

People who follow the news on the foreclosure crisis and loan modifications may remember a lot of debate about mortgage "cramdowns." This is a bankruptcy and lending industry term for reducing the principal owed on a loan, generally to the market value of the physical property that secures that loan. A lot of fuss was made in early 2009 about the possibility that Congress could pass a law allowing home mortgages to be crammed down for people who went into Chapter 13 bankruptcies. In the end, that law did not pass, in part because of opposition from mortgage lenders who said it would make loans more expensive and harder to get by cutting into their profits. However, many people don't realize that Riverside County individual bankruptcy attorneys like us get cramdowns all the time -- on loans other than a primary home's mortgage.

In fact, cramdowns are available in Chapter 13 bankruptcy for nearly any type of secured loan other than a loan on a primary home. This includes loans for cars and trucks, second homes, boats and anything else that can be repossessed if the loan is not paid. Most often, this is done with car loans. Under the 2005 changes to the bankruptcy code, this can only be done with cars purchased more than 910 days (2.5 years) ago. You may cram down any amount of the loan that exceeds the retail value of the car. Thus, if you owe $10,000 on a car whose Blue Book value is $8,500, you could cram down the remaining $1,500 as long as the car was purchased more than 2.5 years ago. You can also modify the interest rate to the current "prime" interest rate plus a 3 percent "risk" premium, which could drop the interest rate for some filers.

Cramming down auto loans for Chapter 13 filers is not an uncommon move for our Pomona consumer bankruptcy lawyers. In fact, we were recently able to cram down two auto loans for one client to the fair market value of the vehicles. The client's payment plan had them repaying the loans at an interest rate of 5.25 percent over 60 months (five years). This is typically proposed as part of the client's Chapter 13 payment plan, and the court may either accept or reject the plan (with input from creditors). We also stripped liens -- legal claims to the vehicles by creditors -- that might otherwise have prevented the client from doing anything that could affect their value. This can benefit our clients substantially by allowing them to hold on to their vehicles at a lower, more affordable monthly payment. Not only does this allow clients to keep driving to work and elsewhere, but it allows them to complete their payment plans and eventually discharge their bankruptcies.

Howard Law PC helps clients throughout California explore bankruptcy as an option for dealing with overwhelming debts. In our line of work, we meet frequently with clients who have put off bankruptcy because they believe it will cause them to lose everything they own. In fact, this is not usually the case -- filers can exempt certain property from their bankruptcies entirely. Chapter 13 filers can also hold on to property through payment plans like the one mentioned above, in which they make a plan to repay creditors under a different arrangement than the one they originally made. And, as you see here, our Huntington Beach personal bankruptcy attorneys can help clients pay back some loans at a reduced rate. Our goal is to help clients through the legal and financial process of bankruptcy and give them a fresh start, with the tools they need to rebuild their financial lives.

Howard Law offers free, confidential case evaluations to all potential clients, so you risk nothing by speaking to us about your rights and your case. To learn more or set up a meeting, send us a message through our website or call 1-800-872-925 today.