When it comes to cars, I seem to have two kinds of clients: either they have older cars with modest value, or they have newer cars that are worth much less than the loans they are paying for them. The good news is that I have never had a client lose their car after they filed bankruptcy against their wishes. Some have willingly volunteered them, but none have been left without transportation to get to work or getting their children to school.
Whenever someone has car loan, I ask them if they want to keep the car. Of course, most of them say yes. They need the car to get to work and take care of their family. But then I’ll ask them how much their monthly payment is and if they’re having trouble paying that. I want to talk about whether or not it makes sense to keep the car. If they traded in a car that already had a loan on it when they bought their current car, they loaded additional debt onto the car and it is likely worth significantly less than what it’s worth.
I want my clients to emerge from the bankruptcy process in the best financial condition possible. For some, this means shedding an expensive car payment. Ultimately, the decision to keep or surrender the car is up to my client, but I want to discuss all possible options so they can make an informed decision.
Why You Need To File A Chapter 13 Bankruptcy If You Want To Do A Cramdown
Chapter 13 bankruptcy offers certain advantages over Chapter 7 bankruptcy, depending on your specific financial situation. You cannot cram down a car loan or mortgage in a Chapter 7 bankruptcy.
In a Chapter 13 bankruptcy, you can break up certain secured debts into two parts: the part that is secured by the fair market value of the collateral, and the part that exceeds the fair market value of the car. For example, if you owe $10,000 on a car, but the car is only worth $6,000, you may be able to “cram down” the debt amount to $6,000.
Of course, there are some restrictions on such a cramdown. For example, you cannot cramdown a car loan if the car was purchased fewer than 910 days before your attorney files your petition. You should talk to your attorney to see if a cramdown will help you reduce the amount you owe.
To be candid, I would never advise someone to file a Chapter 13 just to cram down a car loan. Instead, I’d suggest they file Chapter 7, surrender their underwater car, and buy an affordable used car after they get their Chapter 7 discharge.
As I mentioned above, it’s also possible to cramdown a second mortgage or HELOC in a Chapter 13 bankruptcy. We’ll explore this issue in a future article.
Talk To An Experienced Denver, Colorado Bankruptcy Attorney To See If Bankruptcy Is The Right Option For You
If you’re overwhelmed by debt and not sure how get yourself off a treadmill that doesn’t lead to your financial goals, bankruptcy might be a good option for you. We offer free consultations with an experienced Denver, Colorado bankruptcy attorney to explore your options. You can schedule an appointment for a time that is convenient for you by clicking here.
Check out reviews from our clients on our Facebook, Google, and Avvo pages!