Yes. In bankruptcy, there are a couple strategies regularly employed by clients to help with their monthly car expense. First, clients can “cram-down” their car payment through a Chapter 13 bankruptcy case. Another commonly used strategy is to eliminate liability on the car note in a Chapter 7 bankruptcy case.
The Expensive Car Problem
I’ve seen more and more clients coming to my Asheville bankruptcy law firm with car payments that far exceed what they can afford in their budget. This is not luck, chance or coincidence. Banks have been focusing on the subprime market, often extending loans for struggling consumers with principal loan amounts twice as much as the car is worth. Why? Banks are doing this because it is extremely profitable, just as they did with mortgage loans in the late 2000s. The big difference, as explained in this New York Times story from Sunday, is that lenders can easily repossess cars. Banks have learned that foreclosures take longer.
Chapter 13 Options
The Times story reveals interest rates up to 23%, and I have personally seen loans in the 18%-20% range in my practice. One strategy to deal with a bad car loan is to cram down the payment in a Chapter 13 bankruptcy. In Chapter 13, you can cram the interest rate down to the Till Interest rate (currently 5.25% in Western North Carolina), and pay off the bad loan over a 5 year “repayment plan” period. If you bought the car more than 910 days prior to filing, or have ever refinanced the loan, it may be possible to also “cram down” the principal balance of the loan to the value of the car. Frequently, a Chapter 13 bankruptcy works well for working families who just can’t seem to get caught up on bills.
Chapter 7 Options
Another common strategy is dump a bad car and/or bad car loan in a Chapter 7 bankruptcy case. By filing for Chapter 7, and “surrendering” a client’s interest in the bank’s collateral (the car), a client can avoid liability on the car loan permanently. Replacing the surrendered vehicle can be done either by taking out a new loan for a less expensive car or by paying cash for a less expensive vehicle. Lastly, in Chapter 7, clients have the option of “redeeming” their car by paying the lender the fair market value of the car at the time of filing. Frequently, a ‘redemption loan’ is needed in order to accomplish this strategy, and several banks specialize in these kinds of loans.
Another common strategy employed by my clients is to eliminate unsecured debt payments in Chapter 7, and keep the car they are driving with no changes. By clearing out credit card, medical, and personal loan payments, more money is available to make the car payment.
As a bankruptcy attorney helping clients in Asheville, Hendersonville, Weaverville, Black Mountain, and all the way out to Franklin, I’d be pleased to discuss these strategies in a free, initial bankruptcy consultation.