Although no one wants to file bankruptcy, it is important that if someone is going to go through the process, he/she understands all the ways to improve ones financial situation. In addition to discharging debts, debtors also have in certain circumstances the right to modify existing agreements with creditors.
Although a debtor cannot modify the lenders rights in a residential mortgage, that is an option for the debtor with vehicles. In a chapter 7, the debtor can redeem a car, as opposed to continuing on with the same contract, which is known as a reaffirmation. In a chapter 13, the debtor can modify the car lenders rights through a process known as a cram down.
A cram down is done in a chapter 13 plan, where as part of the debtors reorganization plan the debtor pays off the car at a reduced rate from the contract rate. The debtor does so by bifurcating the contract balance into secured and unsecured amounts. The secured amount is the fair market value of the car, and the unsecured claim is the difference between the payoff on the contract rate and the secured amount.
So if the debtor still owes $21,000 on his car when he files chapter 13 bankruptcy, but the car is only worth $12,000 at that time, the debtors chapter 13 plan will pay off the secured claim of $12,000 entirely and the remaining $9,000 balance will fall into the debtors unsecured pool. The debtors unsecured pool will vary based on the particularities of the debtors case, and the debtor might not be required to pay anything to his unsecured creditors.
However, a cram down is not available in every chapter 13 case. For the debtor to take advantage of this provision, the loan must have been entered into at least 911 days prior to the filing of the case if the vehicle is for the personal use of the debtor. 11 U.S.C. Sec. 1325. Furthermore, if the balance on the loan is already equal to or less than the value of the car, then the provision cannot help out the debtor. If the debtor has not had the loan for at least 911 days, then the debtor cannot bifurcate the balance and must pay it in its entirety in the chapter 13 plan.
In addition to changing the loan amount, a chapter 13 debtor can also change the interest rate. This is generally true whether or not the debtor has qualified for the cramdown. The debtor can generally get away with proposing an interest rate of prime plus anywhere from 1.5%-to-3.0%.
Although the procedure will vary by district, in many districts, including the Northern District of Georgia, the debtor will specify in his/her plan that the car is eligible to be crammed down and at what dollar amount and interest rate the debtor proposes to pay. It is then incumbent upon the lender to object to either the fair market value or interest rate the debtor has proposed. If the creditor objects, the debtor can settle the difference with the creditor or allow the judge to decide.
It is important to note the majority of chapter 13 plans do not make it to completion. In such an instance, the debtor is returned to his pre-filing contractual obligations. Should the debtor have altered the contract in a chapter 13 through the cramdown procedure, the debtor might be significantly in arrears on the original contract.