How Do You Do Lesson 13 Sec 4 On Code.Org Upside Down on Car Loan – Chapter 13 Cram Down Provisions and Chapter 7 Redemption

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Upside Down on Car Loan – Chapter 13 Cram Down Provisions and Chapter 7 Redemption

Clients are often in need of debt relief due to a defaulted car loan.

Modern day society requires owning and maintaining a car which can sometimes be a devastating financial burden. Lenders are quick to finance vehicles knowing that borrowers prioritize automobile transportation more than most other financial obligations. Even borrowers with bad credit are fitted with a car investment package priced at high interest rates to compensate aggressive lenders for the added risk.

Financial difficulties often arise from auto financing. The happy car buyer drives their new car off the lot financed almost 100%. As stated, almost immediately after that, the new vehicle depreciates in value several thousand dollars before it hits the highway.

Car transportation costs $4,000.00 to $6,000.00 per year including car loan payments, liability and collision insurance, repairs and maintenance and fuel.

The trouble starts when the unexpected repair of the car that is not covered by the warranty, or a car accident, in an unexpected and large decrease in the value of the car that is much less than the outstanding loan balance owed to the bank. Or, perhaps more harmlessly, in a trade-in for a new car where eager dealers and car lenders agree to take your old car in trade, and drop the remaining outstanding balance. that balance from your old car loan (for a slightly higher payment) on the back-end of your new car loan leaving the new car buyer more ‘back-to-back’ on buy a new car.

These situations leave the borrower in a predicament where a large portion of the income is allocated to cover an unsecured car loan obligation without the benefit of maintaining a modest cost of living. in the family.

Under some circumstances relief from these devastating financial difficulties can be obtained through a bankruptcy filing.

CHAPTER 13 CRAM DOWN PROVISION

Under Chapter 13 of the United States Bankruptcy Code, Debtors are allowed to ‘Cram Down’ the unsecured portion of their auto loans to the fair market value of the vehicle securing the loan. It requires borrowers to pay only the secured portion of the car loan, but the unsecured balance is considered as a total unsecured creditor which provides many benefits for the Borrower, allowing the Borrower to pay only a small portion of the unsecured portion of the car loan. in debt.

As an example, let’s say our borrower has a car worth $10,000.00 and has an auto loan with a balance payment of $20,000.00. In this scenario, the loan is only partially secured. The car lender is only insured to the extent of the car’s value or $10,000.00. The remaining $10,000.00 loan balance is unsecured. In this situation the Bankruptcy Code gives the Debtor the right to cut off the unsecured portion of the auto loan and treat that portion of the loan as unsecured. Therefore, if the General Unsecured Creditors only receive a dividend of 20%, the auto lender will only receive $2,000.00 of his unsecured portion of the auto loan.

These situations become sticky between Debtor and Lender because there are often disagreements about the correct value of the vehicle. Your bankruptcy attorney should negotiate a valuation settlement before confirming the Debtor’s Chapter 13 plan.

The valuation is guided under the provisions of the United States Bankruptcy code, specifically 11 US Code § 506 – Determination of Secured Status.

11 USC §506(a)(2) specifically states:

“If the debtor is an individual in a case under chapter 7 or 13, such amount relating to personal property securing an allowed claim shall be determined based on the replacement value of as the property on the date of filing the petition without deduction. For the costs of sale or marketing. Regarding the property acquired for personal, family, or household purposes, the replacement value means the price to be paid by a retail merchant for such type of property taking into account the age and condition of the property at the time the value is determined” emphasis added

The Cram Down provision under the bankruptcy code also provides for reduced interest rates on auto loans. Borrowers often find themselves shelling out huge car payments that are used to cover the extremely high interest rates car lenders often charge risky borrowers.

An interesting exception was implemented under the 2005 Amendments to the United States Bankruptcy Code that prohibits cram downs where the purchase money auto loan originated within 910 days (2 ½ years) of the date of the Chapter 13 bankruptcy filing. [see 11 U.S.C §1325(a)(9)]. Debtors should consider the timing of filing Chapter 13 if they want to escape the burden of a heavy auto loan debt. Bankruptcy rules require that car loans taken out within 2 ½ years of the bankruptcy filing must be repaid as agreed.

CHAPTER 7 REDEMPTION

Cram down is not allowed under Chapter 7 bankruptcy (or ‘straight bankruptcy’). However, Chapter 7 debtors are allowed to ‘redemption’ personal property under 11 USC §722.

11 USC §722 provides the following:

“An individual debtor may … redeem tangible personal property intended for personal, family, or household use, from a lien securing an unpaid consumer debt, if such property is excluded under section 522 of this title or abandoned under section 554. of this title, by paying to the holder of such lien the amount of such holder’s allowed secured claim secured by such lien in perfect at the time of redemption.” emphasis added

Redemption, however, can be difficult under Chapter 7 because borrowers must pay in full a lump sum of money sufficient to pay off the secured portion of the auto loan measured in equity. market value of the vehicle at the time the Borrower seeks redemption. the car. Chapter 7 does not allow for a loan modification, but sometimes the auto lender accepts payments over time, but usually in the short term.

CONCLUSION

If your car is worth less than you owe on it, bankruptcy options can be beneficial in allowing you to keep your car and move to better financial health.

Chapter 13 can reduce or ‘tighten’ your loan balance and interest charges thus lowering your car payment to make it affordable. Chapter 13 also enables you to restructure past due car payments and spread them over the term of the Chapter 13 plan so that you can afford to catch up on past payments within your personal financial means.

Chapter 7 bankruptcy does not accommodate rescheduling of debt payments but the redemption provisions of §722 allow debtors to purchase their vehicles out of bankruptcy for the vehicle’s fair market value, which leaves the unsecured portion of the debt discharged under Chapter 7 bankruptcy.

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