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Repossession Lawyers Serving Scranton & Surrounding Areas
Helping You Restructure Your Vehicle Loan
Are you “underwater” on your vehicle, meaning it’s worth a lot less than what you owe? If so, bankruptcy could give you the right to the title if you pay your lender what the car is worth instead of what you owe.
Normally, if a lender repossesses your car because you haven’t made payments, they might not recover the full amount you owed when they sell it. They would then sue you for the balance. When you file bankruptcy, however, they can no longer sue you to recover the full amount because it will be discharged by the bankruptcy court.
If you file bankruptcy BEFORE they repossess it, they won’t be able to take your car without getting permission from the bankruptcy court.
Due to these factors, people often use bankruptcy to either:
The bankruptcy laws permit you to keep the vehicle so long as the lender gets the same amount that it would have received if you had surrendered it. So, if you pay the lender the value of the vehicle, the lender must give you the title. This treatment of a car loan is called “redemption” in a Chapter 7 case or “cramdown” in a Chapter 13 case.
What Is The Chapter 7 Redemption?
To redeem a vehicle in Chapter 7, you must pay the lender the value of the vehicle in one lump sum. Most people are unable to do that, so redemptions are relatively rare. However, some companies offer redemption financing.
After you have filed a bankruptcy case, the redemption financing company may offer you a loan at a very high interest rate to provide the funds you need to make the lump sum payment to the previous vehicle lender.
Then you have a new vehicle loan for a smaller amount (the value of the vehicle rather than the previous payoff) but probably at a much higher interest rate. The economics of this type of arrangement can make sense depending on the condition of the vehicle and the amount by which it is underwater.
What Is The Chapter 13 Cramdown?
A Chapter 13 cramdown is much more common than redemption. In a cramdown, the lender is not entitled to receive the payment in one lump sum.
Instead, the payment is made through the bankruptcy trustee’s office during the life of the bankruptcy case. The lender is also entitled to receive interest on the payment during the life of the bankruptcy case, but the interest rate is relatively low.
What Are The Chapter 13 Cramdown Restrictions?
There is a restriction on a cramdown that is not present for a redemption. Generally, to cramdown a car loan, the loan has to be at least 2½ years old.
What Is an Example of Chapter 13 Cramdown?
For example, if you had a car that was worth $8,000 and had 3 years left on a 6-year, $390/mo car loan, that car payment could be reduced in a Chapter 13 case to $260/mo for 3 years.
Of course, it probably wouldn’t make sense for most people to file bankruptcy simply for that $130/mo savings. However, for someone who is going to file a bankruptcy case anyway, this vehicle cramdown might offer additional help with a tight budget.