Individual Chapter 11 fact: You can always cram down your car

29 Oct Individual Chapter 11 fact: You can always cram down your car

In Chapter 13, if you want to retain your vehicle, you cannot alter the principle amount owed on the vehicle if you bought it within 910 days of the filing of the bankruptcy petition. This is notoriously known as the “hanging paragraph” of Bankruptcy Code § 1325(a).

However, the individual Chapter 11 debtor is not bound by the “hanging paragraph,” meaning any vehicle with negative equity, regardless of when it was purchased, is subject to valuation and cram down under Chapter 11. Furthermore, those high interest rates get crammed down too!

For example, let’s say that in 2008, Joe the Plummer rolled $5,000 of negative equity into a new 2008 Chrysler Town & Country Limited minivan, paying a total of $38,500. He financed it for 6 years at 8%, with payments of $675 per month. Over the life of the loan, he will pay $48,602 for the vehicle.

Eighteen (18) months later, when Joe files a bankruptcy to reorganize his debt, the minivan has 25,000 miles on it. Assuming he’s two months behind on the payments, he owes the bank about $31,650 including late fees and costs. Remember, he has already paid $10,848 on this loan.

The Kelly Blue Book value of the vehicle is $20,375.

If Joe file a Chapter 13:

Since he is subject to the “hanging paragraph” of 1325(a), Joe can’t cram down the value of the Chrysler. He will reamortize $31,500 at 5% over 60 months. Payments are $595 to the creditor PLUS $59.50 to the Chapter 13 trustee (10% in the Middle District of FL). Total payments equal $39,236.40.

Considering the $10,848 Joe has already paid, he is paying a total of $50,084.40 for the vehicle. This is NEARLY $2,000 MORE than not filing bankruptcy!

However, if Joe files an Individual Chapter 11:

Since cram down is permissible, Joe will reamortize $20,375 at 5% over 60 months. Payments are $384.50 PLUS NO TRUSTEE FEE. Total payments equal $23,070.00. When added to the $10,848 Joe has already paid, he is paying a total of $33,919 for the vehicle.

Numbers don’t lie. The Individual Chapter 11 would save Joe a whopping $16,165.40 versus filing a Chapter 13. Even if the additional attorney fee and filing fee is $11,000, Joe STILL SAVES more than $5,000 on this one item alone.

Just think how much Joe would save if he needed to cram down two cars.

But wait, there’s more . . .

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Chip Parker is the managing partner of Parker & DuFresne, P.A., where he represents Northeast Florida businesses and consumers facing bankruptcy, and homeowners facing foreclosure. His firm files more homeowners in the Mortgage Modification Mediation Program than any other law firm in Northeast Florida. Parker is the recipient of Jacksonville Area Legal Aid's prestigious Award for Outstanding Pro Bono Service. Mr. Parker is an active member of the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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