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Vermont Bankruptcy Services

Law Office James Palmisano
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Montpelier, Vermont 05602
Phone: (800) 585-3169
Phone: (802) 229-4001
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.:Reduce Car Loans - "Cram Down" :.

Cram-down is a term used in bankruptcy law to refer to the Chapter 13 provision that allows a person to reduce his or her car loan payments when the vehicle is worth less than the amount owed on the vehicle.

Cram-down can be used when the collateral is worth less than the amount owed or when the number of payments left on the debt is less than the length of the Chapter 13 Plan. The interest rate being charged by the Secured Creditor can also be reduced in a Cram Down.

Example of Cram Down

To illustrate the operation of the various aspects of Cram Down, let us suppose that:

  1. A Debtor has a high interest car loan (i.e. 15%).
  2. He has 30 payments left at $400.00 per month.
  3. The pay off figure on the loan is $10,000.00.
  4. The vehicle is only worth $6,000.00, due to its age and mileage.
  5. The Debtor still wants to keep the vehicle.

In Chapter 13 a Debtor can:

  1. Cram Down the Secured Creditors Claim to the value of the Collateral (i.e. $6,000.00).
  2. Extend the payment term to 60 months (assuming a 60 month Plan is proposed).
  3. Pay the present value (i.e. $6,000.00) of the vehicle at a reduced interest rate, commonly referred to as "Till interest" (after a Supreme Court case where one of the litigants was named Till).
  4. The relevant interest rate is the Prime Rate of Interest (which varies) plus a Risk Premium of 1% - 3%.

For the sake of this example, let’s assume that the "Till interest" rate would be 8.5%.

  1. This Chapter 13 Debtor would have to pay in full only the present value of the vehicle (i.e. $6,000.00).
  2. Debtor pays the $6,000.00 over 60 months at an interest rate of 8.5%.
  3. The monthly car payment made through the Plan would only be $123.11 per month, resulting in a considerable savings to the Debtor.
  4. The "unsecured" portion of the outstanding loan (i.e. $4,000.00) would be paid as a general unsecured claim through your Plan, along with your credit cards, etc., usually for a fraction of the actual amount due.

This can result in a tremendous savings to a Debtor, and by effectively allowing you to "refinance" your car loan you may be able to free up your cash flow and dramatically improve your financial position.

Limitations on Cram Down

Under the 2005 Bankruptcy Law changes there are now limitations on a Chapter 13 Debtor’s ability to use this process when dealing with Purchase Money Security Interests ("PMSI"), (i.e. when the money borrowed was used to purchase the collateral, which is the standard scenario in a car loan).

If the collateral for a PMSI debt is a motor vehicle acquired for personal use within 910 days (approx. 2 ½ years) prior to the Chapter 13 filing, the debt can not be crammed down to the value of the vehicle.

If the collateral is not a motor vehicle, the prohibition on cram down only applies if the PMSI debt was incurred within one year prior to the bankruptcy filing.

Dealing with these "910 Vehicle Issues" can be very tricky— timing is everything.

It is also important to know if a portion of the car loan involved the paying off of an existing loan on a car you traded in, since this portion of the debt is not PMSI in nature, it can still be crammed down.

 

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