Kentucky residents who have substantial debts and are considering filing for Chapter 13 bankruptcy should know that if they enter the bankruptcy with a negative equity in a vehicle they have financed, they may be eligible for a loan cramdown. For those debtors who meet certain requirements, they may be able to save money on their auto loan. However, this applies only for a Chapter 13 bankruptcy. A loan cramdown is not an option for Chapter 7 bankruptcy filers.
For vehicle financing, the vehicle serves as the collateral for the loan, which is why if payments for the loan cease, the lender is able to repossess the vehicle. However, only the amount of the loan that is equal to the fair market value of the vehicle is secured. Because vehicles depreciate, individuals who own a vehicle for a few years may have a loan balance that exceeds the current value of the vehicle.
In order to qualify to cram down a car loan after filing for Chapter 13, filers must have owned the vehicle for at least 910 days, and the vehicle’s current value should be less than what they owe on the auto loan balance. Also, any back or future payments should be in a repayment plan approved by the bankruptcy court.
Once a debtor has determined they are a cramdown loan candidate, they must renegotiate the auto loan terms with their lender. In some states, debtors may also request a reduction in interest rates. With the restructuring of the finance agreement terms, the payments will be recalculated.
Individuals who are considering consumer bankruptcy as a way to resolve their substantial debt should speak with a bankruptcy attorney. The attorney will evaluate their financial situation and advise them as to which chapter they are eligible for.