Cramming Down a Vehicle in Chapter 13 Bankruptcy

A Chapter 13 bankruptcy affords a debtor the opportunity to cram down certain secured debts to their actual value, not merely the principal balance owed. This concept essentially takes the principal balance owed on a secured debt that is "underwater" and reduces the secured amount of the debt to what the value of the collateral actually is. This concept has its foundation in basic secured transactions logic that by definition, a security interest can technically only attach to a collateral's value, leaving anything remaining as unsecured.

With vehicles, this would mean rectify an issue that plagues nearly everyone who purchases a new car - the depreciation value. For example, if you had a vehicle that is worth $8,000, but has $13,000 remaining on the principal balance, you can "cram down" the principal balance of the vehicle to be only $8,000 and pay the $5,000 difference as an unsecured creditor according to the terms of your plan. Therefore, if your Chapter 13 plan calls for your unsecured creditors to be paid 10% on their claims, you could complete the $8,000 left on the new principal balance for the vehicle and pay only $500 through the bankruptcy. That would give you a paid in full vehicle after the bankruptcy was over with.

Of course, there are certain stipulations to this valuable bankruptcy tool. The biggest of these is that the vehicle must have been purchased greater than 910 days before the filing of the bankruptcy. This is to prevent people from purchasing new cars, getting stuck with a depreciating asset as soon as they drive it off the lot, and then running into bankruptcy protection to cram down the car. Also, the cram down of the vehicle is subject to a successful discharge in the Chapter 13, so the debtor needs to stay current on payments and finish the case in order for the cram down to be complete.

These are complicated plan provisions in Chapter 13 bankruptcy. It is best to contact an experienced bankruptcy attorney to aid you in these matters.