Chapter 13 Bankruptcy and Cars: “Life is a Highway”

27 Jul Chapter 13 Bankruptcy and Cars: “Life is a Highway”

chapter 13 and car loansFiling a Chapter 13 bankruptcy lets you do things you couldn’t otherwise do in a Chapter 7 bankruptcy. One of the things you can do is “cram down” a vehicle. It sounds a little violent, and I’m sure it feels that way to an auto lender.

Here’s how it works. Let’s say you owe $20,000 on your car, but it’s worth only $10,000. You can value the car at $10,000 and pay that amount as the secured claim. The other $10,000 becomes an unsecured debt and might only be paid a few pennies on the dollar. You crammed the loan down to $10,000.

However, there’s one important limitation to your ability to cram down the vehicle. If you obtained a loan to purchase the vehicle within 910 days–roughly 2.5 years–of filing bankruptcy, you can’t cram it down. (Note that if you purchased the vehicle for someone else’s use–like your spouse–you may still be able to cram down the vehicle as I explained here.)

What if you financed the car within the 910 days?

There are a couple of solutions to this.

First, and most obvious, wait to file your bankruptcy. If it’s day 900, don’t file until the 910 days have gone by since your purchase.

Second, surrender the vehicle. Prior to surrendering the vehicle, purchase another one. And yes, it’s okay to finance one. You’ll pay the newer vehicle loan in full in your Chapter 13. So if you buy a $10,000 car, you’ll repay the $10,000 loan in full. But you won’t pay $20,000 for a $10,000 car.

The Rule is Silly

The 910-day rule is one of the many ill-conceived provisions of our new bankruptcy law written by lawyers for the credit industrial complex. The auto lending lobby came up with the 910-day rule, which, on its face, appears to force debtors to pay their auto loans in full, regardless of the value of the vehicle. Congress allowed the measure to be added to the Bankruptcy Code because they got paid millions from lobbyists for the auto lenders. It’s really that simple: money talks.

Of course, that’s just not going to happen if the car is substantially “upside down,” as the car dealers say. No one’s going to pay $20,000 for a $10,000 car. It’s like trying to legislate that the law of gravity is suspended. Legislate all you want, but in the end, reality rules the day. (And so does gravity!)

Pigs Get Fed and Hogs Get Slaughtered

As my Uncle Al likes to say, “Pigs get fed and hogs get slaughtered.” (Or as we say here in South Carolina, “Pigs get fed and hogs get et.”)

The bottom line to the 910-day rule is that you should approach the situation just like you do in Chapter 7. If the auto lender gets crazy, you let them eat steel. Give them their car back. The world is awash in used cars. Just drive around your town and you’ll see plenty.

And once the crazy auto lender sells that car worth $10,000 for $5,000, it’ll take a huge loss plus incur costs of repossession and sale.

Prior to surrendering the vehicle, just make sure you obtain another vehicle prior to filing your case. And be sure to have your bankruptcy lawyer guide you through this process. Always consult a local bankruptcy lawyer prior to making any large purchase prior to filing bankruptcy. And didn’t someone say, “Life is a Highway?”

In another post, I’ll explain that there are times when you’ll be subject to the 910-day rule and really won’t care.


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Russell A. DeMott is a Charleston, South Carolina bankruptcy lawyer who represents consumer debtors in Chapter 7 and Chapter 13 bankruptcy. He is the author of the Charleston Bankruptcy Blog. He is also a member of the South Carolina Bankruptcy Blog. He files bankruptcy cases for clients in the Charleston, South Carolina division, which runs from Myrtle Beach to Beaufort. The DeMott Law Firm also represents clients in foreclosure defense and mortgage modification. You can also connect with Russ on Google Plus Russell DeMott. Russ can be contacted directly at (843) 695-0830 or by email at russ@demottlawfirm.com.
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