My last two posts concerned options with a car in chapter 7, including the two most popular options, retain and pay/”ride through”, or reaffirmation. But in most cases, the terms of the loan remain the same. In a chapter 13, we can actually change the terms of your car loan for the better.
First of all, we can always revise the interest rate, to what is called the “Till” rate, based on a Supreme Court case. That case says that the rate needs to be reasonable, which is a function of market forces and risk. While judges can make determinations on a case-by-case basis, we get to propose the interest rate, and the judge doesn’t need to make a determination if the creditor does not object, or if something is renegotiated after a creditor objects. We typically get plans with a 5% rate confirmed.
The second big thing we can do to modify an upside down car loan, is what’s called a cramdown, which means renegotiating the balance payable on the car, based on its value, in which case the balance of the loan, above and beyond the value gets deemed unsecured, and can get paid a nominal amount along with other unsecured creditors. You can only do that when you have had the car for at least 910 days, which is about 2 ½ years (if there were 360 days per year, it would be exactly 2 ½ years, which gives you an idea as to how smart the people in Congress are). There are a couple of exceptions where we can actually do this if think you had the car less than 910 days, e.g. if it is a refinanced car loan, if you didn’t purchase if or your own personal use, i.e. for business use, or for a third party such as a spouse or kid.
And the third big thing we can do to modify a car loan, is to cure arrearages if you are behind, which we can even do to recover a vehicle after it has been repossessed, as long as it has not yet been sold at auction. By re-amortizing the loan, stretching the payments out & lowering interest, we can usually lower your monthly payments.
In order to modify a car loan, the car loan needs to be put inside the plan, meaning that you pay the trustee, and the trustee takes a fee of 6% off the top of every payment, and then remit the payments to the creditor. And, essentially, you become married to your vehicle for the rest of the term of the plan, i.e. if the car does not last as long as the plan, you would essentially need to get divorced from the car, which means going back to your attorney to modify the plan, which of course, can end up costing more.
If a person is otherwise eligible for either a chapter 7 or 13, I usually don’t recommend doing a 13 for the sole reason of modifying a car loan. Chapter 13’s cost more, and there’s always the chance that the vehicle won’t last, or that there’s other circumstances where you can’t afford it anymore, in which case you’re probably better off in a chapter 7. Thus, I have a mantra, “no heroic efforts” to save a vehicle. If a person does want to file chapter 13 for the sole reason of modifying the car loan, I would typically request a lot more, if not all, of the fee for chapter 13 upfront, in light of the risk involved. We typically do the analysis on the vehicles when a person is doing a chapter 13 for other reasons, such as curing mortgage arrears, being forced into a 13, due to an eligibility for chapter 7 due to high income or a prior case within the last eight years.