By Ryan C. Wood
If you did not get a very good deal when purchasing a new or used car and the loan is destroying your finances each month there is light at the end of the tunnel. In Chapter 7 you can redeem the vehicle for its fair market value pursuant to Section 722 of the Bankruptcy Code (I cannot recommend this though, see why below). In Chapter 13 you can “cram down” the loan to the fair market value and reduce the percentage rate if you purchased the vehicle at least 910 days prior to filing for Chapter 13 bankruptcy.
Law Change in 2005 for Chapter 13 Cases and “Cram Down” of Vehicle Loans
Prior to 2005 the requirement that the purchase date of the vehicle be 910 days prior to filing of the Chapter 13 bankruptcy case did not exist. Today they say a car loan is either a 910 loan or not. We will assume you did purchase your vehicle 910 days ago and you are thinking about filing for bankruptcy.
How A Chapter 13 Bankruptcy “Cram Down” Works
As time goes by usually most vehicles are worth less than what is owed on the loan. The worse the loan or higher the percentage rate the more likely the difference between what is owed and what the vehicle is worth is larger. Under these circumstances you can save more money by filing a Chapter 13 bankruptcy and reorganize the vehicle loan. I will use a Mercury Grand Marquis as an example given that Forbes.com (http://www.forbes.com/2010/10/27/cars-resale-value-lifestyle-vehicles-depreciation-residual-used_slide_6.html) claims this car is one of worst investments you can make. After 60 months the Mercury Grand Marquis loses 87% of its value.
You purchased a 2012 Mercury Grand Marquis for $30,285.00 with a loan with a percentage rate of 12.5% and a $1,500 cash down payment and a 60 month term. The monthly payment is $647.60. After 910 days (2.52 years) the 2012 Mercury Grand Marquis is only worth $8,782.65 according to Forbes.com and you still owe $19,411.80. When filing for Chapter 13 bankruptcy you will only have to pay the fair market value of $8,782.65 at approximately 4.5%. You will save approximately $9,587.40 by filing a Chapter 13 bankruptcy case. As most experienced bankruptcy attorneys know car loan companies and banks usually object the value of the vehicle you propose in the Chapter 13 Plan. This is normal. It is in their interest to always argue the value is higher and your interest to argue the vehicle value is lower. The value is also the retail value more or less also. If you use the private party value or some other value you will off the mark.
How to Value a Car When Attempting to “Cram Down” the Value
First the date of the valuation should be the date the petition is filed pursuant to Bankruptcy Code Section 506(a)(2). Section 506(a)(2) further provides the value of personal property shall be determined based on the “replacement value of such property as of the date of the filing of the petition.” In addition, if the property was obtained for personal use the Bankruptcy Code further defines “replacement value” as the “price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.” A good case about valuing a vehicle is In re Morales, 387 B.R. 36, 45 (Bankr. C.D. Cal. 2008). Most courts will start with the Kelley Blue Book or N.A.D.A. Guide retail value for a like vehicle taking into consideration evidence present regarding he condition of the vehicle. KBB and N.A.D.A are suggested values only. So the KBB or N.A.D.A. value must be adjusted for the condition of the vehicle and must reflect that the KBB or N.A.D.A. value is the asking price, not the final price. Few to no cars are ever sold at the asking price by dealers in a retail setting.
So after all that if the value of the vehicle is low enough and the amount due on the vehicle loan is high enough to save you money on the vehicle loan filing a Chapter 13 case to reduce how much you pay for the car should be successful and in your best financial interest. Your bankruptcy attorney will have fees and costs for filing the Chapter 13 case though. So that needs to be taken into account also. There will most likely be other benefits to you filing for a Chapter 13 Bankruptcy also like discharging your credit card debt or unpaid taxes.
Chapter 7 is Different: The Car is Redeemed Under Section 722
In a Chapter 7 bankruptcy case you can also reduce the amount you pay for a vehicle loan pursuant to Section 722 of the Bankruptcy Code by redeeming the vehicle for its market value. The valuation of the vehicle is similar to that in Chapter 13 case, but the law and process is very different. A motion must be filed to redeem the vehicle. The catch with redeeming a vehicle in Chapter 7 for less than was is owed (market value) is you have to pay off the old loan with a lump sum payment. So for the example above the person redeeming their vehicle in a Chapter 7 case would have to come up with $8,782.65 to redeem the 2012 Mercury Grand Marquis. Most of our Chapter 7 bankruptcy clients do not have the cash lying around to redeem their vehicles like this. So there is a solution. There are companies out there that provide new financing or a new loan to pay off the old loan and allow you to redeem the vehicle. As I said at the beginning of this article I cannot recommend obtaining new financing to redeem under 722 of the Bankruptcy Code because the new financing is usually with a high interest rate and there are a number of fees involved. There will also be attorneys’ fees and costs for fling the motion to redeem that must be taken into account when determining if redeeming the vehicle is in your best financial interest. What you choose to do is up to you though. Just be careful and do not lock yourself into another bad loan thinking you are saving money.