Chapter 13 and Car Debt: Getting That Car Out From Underwater
If you financed your car over two and a half years ago (910 days), Chapter 13 bankruptcy often allows you to reduce the total balance of your auto loan and almost always pay a lower interest rate on that loan.
Lets say three years after purchase, you owe $20,000 on your car loan, but now the vehicle is only worth $10,000. Because your loan is no longer fully secured by the car (only $10,000 of the loan is secured), 10,000 of that loan is unsecured. The remaining $10,000 that is no longer secured by your car is just added to your total of unsecured debt, a percentage of which you may or may not pay off over the course of your Chapter 13 repayment plan. Really most debtors pay only a small portion of their unsecured debt over the life of a plan.
Since debtors often pay back dimes on the dollar or less on their unsecured debt, the opportunity to cram down a car loan represents an enormous potential savings. The happy news then is that in your Chapter 13 bankruptcy, you can now reduce the principal balance of your car loan to the replacement value of the car. So, in the above example, you could reduce your loan balance to $10,000. Even better, the interest rate on this new balance is set somewhere between four and six percent. So the car that once was a total underwater loser is now worth paying for. This is one of the reasons why Chapter 13 is often ultimately a much cheaper and better option. Assuming that Chapter 7 is the only way to go is often to the consumer’s detriment.