How Can I Lower My Car Loan Balance in a Chapter 7 Bankruptcy?
By Brett Weiss, Maryland Bankruptcy Attorney on Aug 15, 2009 in Bankruptcy Practice and Procedure, Chapter 7 Bankruptcy, Life After Bankruptcy
Your car is worth a whole lot less than you owe on it, and you’re in a Chapter 7 bankruptcy. Is there a way to lower your loan balance?
In a Chapter 13, you may be able to do a cramdown, where you reduce the loan balance to the car’s value, but you can’t in a Chapter 7. Chapter 7 instead allows you to “redeem” the car. What is a redemption and how does it work?
When you redeem your car, you pay a lump sum of cash equal to the retail value of the car. For example, if your car would sell for $10,000 at CarMax, and you owe GMAC $15,000 on it, you’d have to pay GMAC $10,000.
“Great,” most people say. “I’m in bankruptcy because I can’t pay my bills, and you want me to come up with $10,000 I don’t have. Not much of an option!” This is absolutely correct, except for one thing: believe it or not, there are many lenders who are willing to loan you money to redeem your car, even while you’re in the middle of your Chapter 7.
Needless to say, good credit is *not* a requirement for these loans, but a steady job usually is. These loans normally run 4-5 years, and you’ll pay a hefty interest rate–around 25% APR. But even with this, the savings may still be worth it.
Ask your attorney whether redemption would be right for you.
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