Upside Down on Automotive Mortgage – Chapter 13 Cram Down Provisions and Chapter 7 Redemption

Shoppers usually discover themselves in want of debt reduction due to a automotive mortgage gone badly.

Modern-day society necessitates proudly owning and sustaining an vehicle which generally evolves right into a devastating monetary burden. Lenders are fast in financing automobiles realizing debtors extremely prioritize vehicle transportation over most different monetary obligations. Even debtors with very bad credit are fitted into an vehicle financing packages priced at excessive rates of interest to compensate aggressive lenders for the added threat.

Monetary issue usually arises from auto financing. The completely satisfied automotive purchaser drives their new car off the lot financed almost 100%. Because the saying goes, virtually instantly thereafter, the brand new car depreciates in worth a number of thousand {dollars} earlier than it’s even hits the freeway.

Car transportation prices $4,000.00 to $6,000.00 yearly together with auto mortgage funds, legal responsibility and collision insurance coverage, repairs and upkeep and gasoline.

Havoc begins when an sudden automotive restore not lined by guarantee, or a motorized vehicle accident, unexpectedly and considerably decreases the worth of the car far under the excellent mortgage stability owed to the financial institution. Or, maybe extra harmlessly, on a trade- in for a brand new car the place keen automotive salespersons and lenders agree to soak up your outdated car on commerce, and throw the remaining excellent stability out of your outdated automotive mortgage (for slightly larger cost) on the back-end of your new auto mortgage leaving the brand new automotive purchaser significantly ‘upside-down’ on the brand new car buy.

These conditions go away the borrower in a predicament the place sizable parts of revenue are devoted in direction of overlaying an unsecured auto debt obligation that’s of no use in direction of sustaining modest prices of requirements for household residing.

Beneath sure circumstances reduction from these devastating monetary predicaments might be obtained by way of a chapter submitting.


Beneath Chapter 13 of the USA Chapter Code, Debtors are permitted to ‘Cram Down’ the unsecured portion of their auto loans to the honest market worth of the car securing the mortgage. This requires debtors to pay again solely the secured portion of the auto mortgage, however the unsecured stability is handled as a basic unsecured collectors offering substantial profit for the Debtor, allowing Debtor to solely pay a small fraction of the unsecured portion of the auto mortgage debt that’s owed.

For instance, let’s suppose our debtor owns a automotive price $10,000.00 and there’s an auto mortgage with a payoff stability of $20,000.00. On this situation, the mortgage is simply partially secured. The auto lender is secured solely to the extent of the worth of the car or $10,000.00. The remaining $10,000.00 stability on the mortgage is unsecured. On this scenario the Chapter Code affords the Debtor the fitting to chop off the unsecured portion of the auto mortgage and deal with that portion of the mortgage as unsecured. So, if Basic Unsecured Collectors have been solely receiving a dividend of 20%, the auto lender would obtain solely $2,000.00 on its unsecured portion of the auto mortgage.

These conditions grow to be sticky between Debtor and Lender as a result of usually disagreements come up as to the right worth of the car. Your chapter legal professional might want to negotiate a settlement over the valuation earlier than affirmation of the Debtor’s Chapter 13 plan.

Valuation is guided beneath provisions of the USA Chapter code, particularly 11 U.S. Code § 506 – Dedication of Secured Standing.

11 USC §506(a)(2) particularly states:

“If the debtor is a person in a case beneath chapter 7 or 13, such worth with respect to private property securing an allowed declare shall be decided based mostly on the alternative worth of such property as of the date of the submitting of the petition with out deduction for prices of sale or advertising. With respect to property acquired for private, household, or family functions, alternative worth shall imply the value a retail service provider would cost for property of that sort contemplating the age and situation of the property on the time worth is decided” emphasis added

The Cram Down provision beneath the chapter code additionally supplies for a discount of the rate of interest on the auto mortgage. Usually Debtors discover themselves shelling out huge auto funds used to cowl exorbitant rates of interest auto lenders usually cost to dangerous debtors.

An fascinating exception was enacted beneath the 2005 Amendments to the USA Chapter Code prohibiting cram downs the place the acquisition cash auto mortgage was originated inside 910 days (2 ½ years) of the submitting date of the Chapter 13 chapter [see 11 U.S.C §1325(a)(9)]. Debtors should contemplate timing of a Chapter 13 submitting in the event that they need to flee the burden of a burdensome auto mortgage debt. Chapter guidelines require automotive loans taken out inside 2 ½ years of the chapter submitting have to be paid as agreed.


Cram downs will not be permitted beneath Chapter 7 chapter (or ‘straight chapter’). However, Chapter 7 debtors are permitted to ‘redeem’ private property beneath 11 U.S.C. §722.

11 U.S.C. §722 supplies as follows:

“A person debtor might… redeem tangible private property meant primarily for private, household, or family use, from a lien securing a dischargeable shopper debt, if such property is exempted beneath part 522 of this title or has been deserted beneath part 554 of this title, by paying the holder of such lien the quantity of the allowed secured declare of such holder that’s secured by such lien in full on the time of redemption.” emphasis added

Redemption, nonetheless, might be troublesome beneath Chapter 7 as a result of debtors should pay upfront in full a lump sum of money an quantity ample to pay the secured portion of the auto mortgage measured by the honest market worth of the car on the time Debtor seeks to redeem the car. Chapter 7 doesn’t allow a restructuring of the mortgage, however generally the auto lender will settle for funds over time, however normally inside a brief time period.


In case your car is price lower than you owe on it, chapter choices might be advantageous in direction of affording you to retain your car and transfer in direction of higher monetary well being.

Chapter 13 can cut back or ‘cram down’ your mortgage stability and rates of interest thereby decreasing your auto cost making it reasonably priced. Chapter 13 additionally lets you restructure overdue auto funds and unfold them over the time period of the Chapter 13 plan so you possibly can afford to catch up the overdue funds inside your private monetary means.

Chapter 7 chapter doesn’t accommodate restructuring of mortgage repayments however the §722 redemption provisions enable debtors to buy their automobiles out of chapter for the honest market worth of the car, leaving the unsecured portion of the debt discharged beneath the Chapter 7 chapter.

Source by David S. Stern, Esq

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