The Cramdown Advantage
Last week we got into Chapter 13 cramdown of vehicle loans and furniture loans. Cramdown can be an excellent way to keep personal property that’s securing a loan. It allows you usually to reduce the monthly payment as well as the total you pay on the debt. Often the reductions are significant. Cramdown can enable you to keep a vehicle or some other important personal property that you couldn’t otherwise. It can be a reason to file a Chapter 13 case because it isn’t available under Chapter 7 “straight bankruptcy.”
The 910-Day and 1-Year Timing Conditions
But as we’ve been discussing there are timing conditions you must meet to qualify for Chapter 13 cramdown. With vehicles you must have entered into the contract at least 910 days (about two and half years) before filing the Chapter 13 case. With any other kind of collateral the contract must be at least a year old.
So, if you bought and financed a vehicle two years ago you can’t do a cramdown on the loan. If you paid too much and it’s depreciated a ton since then, too bad. You are stuck with the full balance on the vehicle loan.
Purchase Money Security Interest
However, in some circumstances these 910-day and 1-year conditions don’t apply. Then you can do a cramdown at any time. That’s if you did NOT buy the collateral with the proceeds of the loan at issue. Rather you owned the vehicle or other collateral free and clear and provided it as collateral for a loan. If so, the 910-day and 1-year conditions don’t apply and you can do cramdown on newer loans.
Imagine that eighteen months ago you took out a car title loan for $4,500. You had fallen behind on your home mortgage and were desperate to catch up. The collateral on the title loan was your sole vehicle, which had no lien against it at the time. It’s now worth $2,000.
You knew that the 50% interest rate was crazy but you’d expected to pay the loan off quickly with a tax refund. But your refund was smaller than you expected, and went to other even more pressing expenses. So you renewed the title loan, twice. You now owe $5,500 because of the interest and renewal charges. You’re supposed to pay $500 per month on that loan but have just fallen a month behind. You are afraid your car is about to be repossessed. (See “The consumer perils of a car title loan.”)
You’ve decided to file bankruptcy. On the advice of your Louisville bankruptcy lawyer you are filing a Chapter 13 “adjustment of debts” case. There are other reasons having to do with your home mortgage, but you also learn you can do a cramdown on this car title loan. You can do so even though you’re still a year short of the 910 days since getting the loan.
Chapter 7 vs. 13
If you filed a Chapter 7 case instead you’d be stuck with the car title loan if you wanted to keep your vehicle. The lender might be willing to adjust some of the terms of the loan. But it would have no obligation to do so. Bankruptcy does not remove the lender’s lien from your vehicle’s title. The only leverage you have is your threat to let them take away your vehicle. (That way the lender would only get the liquidation value of your vehicle.) But the lender knows that you likely really need your vehicle. So that threat often doesn’t help make the lender more flexible. As a result, under Chapter 7 you’d likely have to pay the full balance of $5,500, at $500 per month, at the exorbitant interest rate, or close to it.
Under slightly different circumstances there could be a similar result even under Chapter 13. Assume that you’d bought the vehicle and financed it through this lender 18 months ago. You would not qualify for Chapter 13 cramdown because you wouldn’t meet the 910-day rule. You wouldn’t for another year.
That’s because that 910-day condition only applies “if the creditor has a purchase money security interest securing the debt.” (See the unnumbered “hanging paragraph” right after Section 1325(a)(9) of the U.S. Bankruptcy Code.) “Purchase money security interest” is not defined in the Bankruptcy Code. But it essentially means a creditor’s right to your property created when you use the creditor’s money to purchase that property and immediately give the creditor a security interest in that property.
So if you give a creditor a security interest in collateral you already own, the 910-day and 1-year conditions don’t apply. (That’s a non-purchase money security interest.) You can go ahead and cramdown this car title loan.
Cramdown at Work
The result is that you and your lawyer would propose to pay $2,000 as the secured portion of this loan. Your payment plan would have you pay, say, $100 per month (instead of $500). You’d reduce the interest rate to about 6% (instead of 50%).
The creditor would not have much say about this, except possibly to dispute the value of the vehicle. It might also have some argument with the appropriateness of the monthly payment amount and interest rate. But most likely the terms would end up as you proposed or not much different.
The remaining unsecured portion of $3,500 would be lumped in with all your other general unsecured debts. You would pay these only to the extent that you could afford to pay them during the 3-to-5-year plan. Because all or most of your money would instead go towards secured and priority debts, likely little or nothing would be available to pay this $3,500.
At the end of the Chapter 13 case, whatever wasn’t paid would be discharged—permanently written off. You would end up paying a fraction of what you would have otherwise on the title loan. You would be able to keep your vehicle when it would have been very difficult or impossible without cramdown.