Behind On A Car Loan?
You should consider a Chapter 13 bankruptcy to spread out your payments; reduce your car loan interest rate; and limit the debt you’ll repay to the car’s value.
Spread out the car payments
A Chapter 13 bankruptcy allows you to stretch out the repayment period over 5 years. This makes the monthly cost of keeping your ride considerably less.
Reduce the car loan interest rate to the Till rate
The Supreme Court’s decision in Till v. SCS Credit Corp, 541 U.S. 465 (2004) establishes the interest rate a debtor must pay on his/her car loan in a chapter 13 bankruptcy. The debtor in Till bought a used truck for $6,725 with a 21% interest rate. The debtor’s chapter 13 plan repaid the balance of the truck at 9.5% and predictably the creditor wanted the contract rate of 21%. In its plurality opinion, the Supreme Court determined that there are two steps required for determining the appropriate cramdown rate.
First, the court must identify the national prime rate, which is currently 3.25%.
Second, the court must adjust the prime rate upwards because “bankruptcy debtors typically pose a greater risk of nonpayment than solvent commercial borrowers.” The Supreme Court suggests that the adjustment of 1.0% to 3.0% is appropriate. This two-step formula is referred to as the “prime-plus” rate approach. A debtor should start with a prime plus of 4.25% based on today’s prime interest rate of “3.25%” plus 1.00% to account for the Till adjustment of 1.0% to 3.0%.
Limit the debt to the car’s value
The bankruptcy code also allows you to cramdown a car loan if you purchased the car more than 910 days prior to the filing of your bankruptcy case. A cramdown means that you do not have to pay the contractual balance but the fair market value of the car today. Cramdown provides tremendous savings to consumers because the fair market value is often thousands of dollars less than the car loan.
Summary of Savings
If you are behind on a car loan, a Chapter 13 bankruptcy case may very well be the solution as you can spread out the car payment; lower the interest rate; and cram down the car loan