Chapter 13 Bankruptcy and the 910 Day Rule on Car Loans

The bankruptcy cramdown is a helpful Chapter 13 feature. It allows you to reduce the amount you owe on certain debts guaranteed with collateral, such as a car, rental property, or jewelry.

In this article, you’ll learn more about cars and the cramdown rule, including how, in some jurisdictions, bankruptcy law limits a cramdown to a vehicle purchased more than 910 days before a bankruptcy filing. You'll want to check with a local bankruptcy lawyer about the cramdown rules for cars in your area.

Learn about essential differences between Chapter 7 and Chapter 13.

How Car Loan Cramdowns Work

When you owe more on a car loan than the car is worth, keeping it doesn't always make sense. You can always let the car return to the lender and discharge any amount you owe at the end of your repayment plan. But if you need the vehicle, you’ll want to consider other options.

A Chapter 13 cramdown could provide a workable solution. If you qualify, you can reduce the balance on your car loan to the car's value. For instance, if you owe $10,000 on a car worth $8,000, a cramdown would let you pay $8,000 and own it free and clear when the Chapter 13 case ends.

Chapter 13 Bankruptcy Cramdown Limitations and Requirements

One limitation that might prevent you from taking advantage of the cramdown rule is this: You must pay the cramdown amount in full through your repayment plan. The court won’t "confirm" or approve a repayment plan if a filer doesn’t have sufficient income.

However, this vehicle requirement isn't particular to cramdowns. Anyone with car financing with less than three or five years remaining typically pays the entire car loan in Chapter 13, depending on the plan length.

The 910-Day Rule Qualification

Another limitation to cramming down your car loan is that in some jurisdictions, you must acquire the car loan more than 910 days before you file for bankruptcy. The law intends to prohibit cramdowns on newly purchased cars. If 910 days haven’t passed, you won’t be able to use a cramdown to reduce the loan.

Debts You Must Pay in Chapter 13

The two limitations described above aren't the only hurdles facing Chapter 13 filers. Many people find fully funding a Chapter 13 plan challenging because you must have sufficient earnings to pay other obligations in full.

• Mortgage arrearages must be fully paid to keep a home in Chapter 13.
• Car payment arrearages must be caught up to avoid a Chapter 13 repossession.
• Priority debts, such as newly incurred taxes and support obligations, must also receive full payment in the plan.

The upside is that you won’t pay much on most other debt. But, it isn’t unusual for these requirements to stand in the way of a filer’s use of Chapter 13.

How Much You'll Pay a Car Lender in Chapter 13

You already know that if you qualify for a vehicle cramdown, you’ll pay the reduced balance in full through the plan. You'll also probably pay something toward the amount that exceeds the car's value. The good news is that it won't be more than you'd pay in Chapter 13 anyway.

Using the same example above, assume your car’s value is $8,000 on a $10,000 loan. The cramdown would let you pay the $8,000 in full through the plan. The remaining $2,000 loan balance would be reclassified from secured debt to general nonpriority unsecured debt, the lowest payment category in bankruptcy.

Here's why any additional amount the lender receives is relatively meaningless for most filers.

All higher-priority debts must be paid before creditors in the lowest payment category receive anything. If any money remains, these creditors receive a pro-rata share or an equal percentage of their debts.

For instance, if the creditors in the lowest payment tier were owed $10,000 total but only $1,000 remained for payment, each creditor would receive a 10% debt payout. If the lowest priority creditors were owed $50,000 total, but only $1,000 remained for payment, each creditor would receive a 2% payout.

Learn about calculating a Chapter 13 repayment plan.

Other Chapter 13 Car Requirements

Cramming down your car loan to the car's actual value is a valuable Chapter 13 benefit, and reducing the amount owed can help prevent a car loss. However, qualifying for a cramdown and being able to pay the reduced balance through the Chapter 13 plan aren't the only requirements you must satisfy.

Keeping a car will also depend on whether you can protect or "exempt" the vehicle equity with a bankruptcy exemption. If you can't, you must pay unsecured creditors an amount equivalent to the value of the nonexempt equity through the plan.

If you'd like an estimated Chapter 13 monthly payment, try using our Chapter 13 plan calculator. However, keep in mind that it's an estimate only. Complying with Chapter 13 plan payment rules can be complicated, and a bankruptcy lawyer will be in the best position to explain your options.