Once a bankruptcy case is filed, most creditors are instantly prohibited from continuing collection efforts against a bankruptcy debtor by the “automatic stay.” Car lenders are included in the list of creditors who, because of the automatic stay, may neither commence nor continue collection efforts against a bankruptcy debtor.
The automatic stay prevents a car loan lender from repossessing a motor vehicle in two different situations:
- When a lender has not repossessed a motor vehicle before the filing of the bankruptcy case; and
- When the lender has already repossessed a motor vehicle before the filing of the bankruptcy case.
If a car is repossessed before any bankruptcy case is filed, a Chapter 13 case will typically help secure the return of the vehicle. The chapter 13 plan would have to provide for the payment of the arrearage and the regular monthly payments.
A Chapter 13 bankruptcy debtor may also cram down an automobile loan thus reducing the amount of the debt and possibly even the interest rate. The Bankruptcy Code in § 1322(b)(1) states that a Chapter 13 repayment plan “ may modify the right of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence…”
However, there is an important requirement: To cram down a car loan, it must have been purchased at least 910 days, or almost 2 1/2 years, prior to the filing of the bankruptcy case.
A “cram down” works as follows with an automobile loan. If a car is worth $12,000 and is collateral for a loan with a balance of $20,000, then a debtor may cram down the loan to $12,000 in a Chapter 13 bankruptcy as long as the car was purchased more than 910 days before the case filing. The interest rate of the loan may also be lowered.
The remaining $8,000 of the balance of the loan will be included with other unsecured debts in the bankruptcy case. Only a portion, if any, of this unsecured debt, will be paid in the Chapter 13 plan, and the remainder will be discharged at the plan’s completion. Also, the automobile will be owned free and clear at the end of the bankruptcy.