Oftentimes a person filing bankruptcy is the owner of a car that is secured by an automobile loan. Sometimes they are upside down or have negative equity in the vehicle. Otherwords, they owe more on the car than what is is worth. The Bankruptcy Code provides powerful tools that allow a debtor to limit the liens of secured creditors. There are basically two different approaches that a debtor could take depending on whether they filed a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy.
THE RIGHT OF REDEMPTION IN A CHAPTER 7 BANKRUPTCY CASE
There is what is known as a right of redemption in a Chapter 7 case. The security interest held by the creditor can be eliminated upon making payment to the creditor of the value of the collateral, namely the car. The Bankruptcy Code lists certain requirements that need to be met to qualify for the right of redemption:
1. tangible personal property, and (This must be property that has been exempted by the debtor or abandoned by the Trustee. Even if the debtor has no equity in the property, so long as the debtor has a legal interest of any kind, then the property may be claimed as exempt)
2. intended primarily for personal, family or household use, and (Generally, in order to redeem a piece of property, the redemption must be for the benefit of the debtor and not for the benefit of another person)
3. must be a consumer debt, and (The Bankruptcy Code defines a consumer debt as a debt incurred by an individual primarily for a personal, family, or household purpose)
4. dischargeable debt
A redemption allows the debtor to keep their car and pay the creditor only the acutual value of the car, not the amount of the debt. Assume the debtor had a car worth 8,000, but the amount of the automobile loan was 15,000 at 8%. The debtor could finance the car and only payback the value of 9,000 at 24%. Of course the interest rate is higher, but the monthly payment would most likely still be lower than the current payment. In order to allow the debtor to make the lump-sum payment to the creditor, there are companies that provide redemption financing. Probably the best known is 722 Redemption Funding that can be found at www.722redemption.com or Redemption Financial Services at www.redemptionfinancial.com.
CHAPTER 13 BANKRUPTCY PROVIDES A TOOL KNOW AS THE CRAMDOWN
The Bankruptcy Code has a provision similar to the right of redemption utilized in a Chapter 7 Bankruptcy likewise in a Chapter 13 Bankruptcy. A debtor can change or modify the terms of the contract held by the secured creditor. That provision provides for what is known as the cramdown. The cramdown is where the debtor pays for the value of the collateral, namely the vehicle in this instance, as opposed to the full amount of the debt. In order to utilize the cramdown on your car the following conditions must exist:
1. purchase money security interest, and (The entire amount financed must be on a motor vehicle to be considered a purchase money security interest and would not include situations where the collateral secured a debt other than the price of the vehicle; a consolidation or refinancing of the automobile loan would destroy its' status as a purchase money security interest).
2. incurred more than 910 days preceeding the filing of the bankruptcy petition, and
3. collateral must be a motor vehicle, and (This provision reads that the collateral for the debt consists of a motor vehicle. If the debt is secured by any other collateral, then the restriction of the 910 days would not apply).
4. acquired for the personal use of the debtor (A vehicle that is purchased for a business use or for the use of someone other than the debtor is not considered as personal use of the debtor).
Sometimes a debtor may want to trade-in the car that they currently have toward the purchase of a new car. On occasion, their current car may be worth less than the amount that they owe on their loan, so they finance the difference as part of the purchase on the new car. The creditor does not have a purchase money security interest that secures the entire amount of its' claim. The question becomes whether this negative equity is included in the purchase money security interest. The courts take the view that the financing of negative equity is simply converting unsecured debt into secured debt. Pennsylvania takes the view that the portion of the claim that is a purchase money security interest shall remain. Even if you are unable to get past the 910 day rule, any amount that you have paid toward negative equity will be excluded from the lender's purchase money security interest.
Besides being able to utilize the cramdown, the debtor can lower the montly payment on the car loan by lowering the interest rate and possibly paying the loan over a longer period than provided by the terms of the loan.
If your automobile loan creates a burden for you and you would like to readjust your debt or simply have other questions about filing for bankruptcy, then call Pittsburgh Bankruptcy Attorney Rodney Shepherd at 412 471-9670 or fill out our contact form and you will be contacted shortly to schedule an appointment.