Can bankruptcy lower my car payment?

When most people buy a car, they are "upside down" in the vehicle the second they drive it off the lot. "Upside down" means that the owner owes more for the vehicle than it is worth. When a financial hardship occurs, a large car payment on a vehicle that is worth far less than what is owed can feel like an anchor. Bankruptcy may offer options to assist a debtor out of this situation.

In a Chapter 7 bankruptcy, the owner has two options. He or she could keep the vehicle (and the payment) or the owner could surrender the vehicle with no further obligation on the lien, due to the bankruptcy discharge. This can seem like a hard choice because the Debtor often needs the vehicle as a primary source of transportation. Debtor may feel as though he or she will not qualify to finance a more modest vehicle. However, in today's car market, we are finding that our clients are qualifying for car loans as long as they can show an income source to repay the loan.

In a Chapter 13 bankruptcy there is a third option. The Debtor may choose to have the value of the loan reduced through what is commonly referred to as "cramdown". In order to qualify for cramdown, the car must have either been purchased more than 910 days prior to the bankruptcy filing, or the loan must be over 910 days old. There are other circumstances where cramdown may be allowed, such as certain cases where the vehicle is not a primary vehicle used for household purposes. The attorney for the Debtor will file a Motion to Value Collateral, seeking to reduce the amount owed to the actual value of the vehicle. The interest rate on the loan can also be reduced to a more reasonable interest rate.

In my experience, most of these Motions are resolved between the attorney for the Debtor and the attorney for the lender. However, when these Motions must have a Hearing in front of the Judge, there is sometimes an evidentiary issue because there is a need to have a live person in Court to testify as to the retail value of the vehicle, in order to prove the case. Therefore, I strongly recommend that any person who intends to take advantage of cramdown consider this necessity and make sure there is a qualified person who is willing to come to Court for this purpose before the Motion to Value is filed.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia. For more information about bankruptcy and the services offered by his firm, please feel free to visit the firm's website. If you would like to schedule an appointment to discuss bankruptcy with an attorney, call 301-816-1600, or click here.