The treatment of secured debts in a Chapter 13 is relatively straight forward. By its nature, a Chapter 13 will generally allow you to reorganize your debts, especially secured debts, under the protection of the bankruptcy stay. This will allow you, in the case of your home, to pay back your mortgage arrearages over the life of your Chapter 13 plan or, in the case of a car, allow you, under the correct circumstances, to recalculate the outstanding balance on the loan and/or the interest rate you must pay. In most bankruptcy cases, the Debtor will have a car note or car loan. If you have had the car loan for more than roughly two and a half years (910 days) you can propose to pay pack to the lender the value of the vehicle at the time of filing instead of what you actually owe on the vehicle. In most cases this provides a great deal of savings.
This process is often referred to as a cram down of the vehicle loan. In some cases you can accomplish this by simply listing in your Chapter 13 plan that you are going to pay less on the loan. In many jurisdictions, including Maryland, you must file a motion with the Bankruptcy Court to approve this reduction in loan balance. In most cases, your case trustee will not agree to confirm your plan if such a motion is outstanding or has not been ruled on by the Court. In addition, if the value of the collateral you propose is close to what sites like nada.com or kbb.com value the vehicle at, you will not get an objection from the lender.
As with anything else in bankruptcy, the amount of resistance you get to a motion like this depends on the creditor you are dealing with and the support you have for the asserted vehicle value. In some cases the lender may object, but that is not necessarily a bad thing. In those circumstances you can negotiate with the lender on a compromise, not only to the value of the car but the interest rate you will pay. The results of this negotiation will grant you some certainty in the outcome and allow you to better prepare your final Chapter 13 Plan. In many cases, if each side is willing to give a little the benefit can be great.
In addition to altering the amount of money you repay on a car loan in your Chapter 13 you can also alter the amount of interest you pay on the loan. As I have said many times, Chapter 13 is about reorganizing your debts and altering interest rates is a good way of doing that. The added advantage here is that the loan does not have to be two and half years old. Keep in mind that a loan taken out close in time to filing your bankruptcy will be harder to reduce the interest rate, but not impossible. Generally speaking, an interest rate reduction under these options will not reduce your rate below probably 4.5%. Again, to do this in Maryland you will need to file a motion to set interest rate and these motions are generally governed by the Supreme Court ruling in Till v. SCS Credit Corp., 541 U.S. 465 (2004). The Till case generally provides some guidelines that the lender is entitled to the prime rate plus some risk factor. The prime rate has generally been stuck at 3% for some time and a risk factor of around 1.5% is generally accepted. Again, this will depend on the lender and the judge assigned to your case.
Like a reduction in what you owe, a reduction in the interest rate charged on the loan for the Chapter 13 Plan period can generate huge savings. In many cases, people filing for bankruptcy have car loan interest rates in the 12% or higher range. A reduction to anything near 4.5% creates a lot of savings. In general, the older the loan the less likely you are to get an objection to your proposal from the lender as long as you keep it in the 4.5% range.
In my next post I will discuss the rules regarding how often you can file for bankruptcy.
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