About this guide: St Pete Mitsubishi is a car dealership, and we earn money when customers finance vehicles with us. We've written this guide to be accurate and useful whether or not you buy from us — including the parts that suggest waiting, saving more, or spending less. Written by St Pete Mitsubishi
Falling behind on your car loan can feel even more frustrating if you owe more than the vehicle is worth. If you're filing for Chapter 13 bankruptcy, however, there may be a way to reduce what you owe through a process called a cramdown.
Key Takeaways
- A Chapter 13 cramdown may allow you to reduce your car loan balance.
- To qualify, you must have purchased the vehicle at least 910 days before filing for Chapter 13 bankruptcy.
- The remaining balance is generally treated as unsecured debt and may be discharged after your repayment plan is complete.
What Is a Car Loan Cramdown?
A cramdown is a provision available in Chapter 13 bankruptcy that allows some borrowers to reduce the secured portion of their auto loan to the vehicle's current replacement value. That means if your car is worth less than what you owe, you may not have to repay the entire loan balance.
This option isn't available if you file under Chapter 7, making it one of the unique benefits of choosing a Chapter 13 repayment plan.
When you file Chapter 13, you propose a repayment plan that lasts three to five years. During that time, you make payments to creditors based on the terms approved by the bankruptcy court. The lender still has a secured claim against the vehicle, but only for what the car is actually worth, not necessarily what you originally borrowed.
What Happens to the Rest of the Loan?
Reducing the secured portion of your loan doesn't mean the remaining balance disappears immediately. Instead, the portion of the loan that exceeds the vehicle's value is generally treated like other unsecured debts, such as medical bills or credit card balances.
Many Chapter 13 repayment plans pay only a small percentage of unsecured debt. Depending on your financial situation and the terms of your plan, your lender may receive only a portion of that remaining balance—or, in some cases, very little at all.
Once you've successfully completed your repayment plan, any eligible unpaid unsecured balance is generally discharged. You owe the vehicle free and clear without having to repay the full original loan amount.
Can a Cramdown Lower Your Interest Rate?
Another benefit of a Chapter 13 cramdown is that it may reduce the interest rate on your loan. Instead of continuing to pay the original contract rate, the bankruptcy court may allow a lower rate based on the current prime rate plus a small additional percentage. Lowering both the loan balance and the interest rate can significantly reduce the overall cost of keeping your vehicle throughout your repayment plan.
Are There Any Restrictions?
Not every vehicle loan qualifies for a cramdown. One of the biggest requirements is known as the 910-day rule. To use a cramdown on your auto loan, you generally must have purchased the vehicle at least 910 days (about two and a half years) before filing for Chapter 13 bankruptcy.
This rule prevents borrowers from purchasing a new vehicle shortly before filing bankruptcy and immediately reducing the loan balance through a cramdown.
Is a Chapter 13 Cramdown Right for You?
A cramdown can be a valuable tool for borrowers who owe more than their vehicle is worth, but it isn't available in every situation. If you're considering bankruptcy and have questions about your auto loan, contact our financial team about your options. We're here to help!
Financing information: Financing is provided by third-party lenders, not by St. Pete Mitsubishi. Approval, annual percentage rate (APR), down payment, and loan terms are determined by the lender based on your credit history, income, the vehicle, and other factors. Not all applicants will qualify, and no approval is guaranteed. Rates and terms vary and are subject to change. Contact us for terms that may be available to you.
This article is general information, not legal, financial, or credit advice. Every situation is different, and nothing here is a recommendation about your specific circumstances. Rates, lender requirements, and regulations change frequently, and the information here may not reflect current terms. Verify details with the lender before making a financing decision, and consider speaking with a qualified financial or legal professional. St. Pete Mitsubishi is not a lender, a credit counselor, or a law firm.