When Tennessee consumers file Chapter 13 bankruptcies, they pay down their debts by making monthly payments for three or five years. When one of those debts is secured by a car, boat or other asset, they can include what is known as a cramdown in their Chapter 13 repayment plan. If their secured creditor and bankruptcy trustee approve the plan, they will make payments that cover the fair market value of the collateral instead of the amount they still owe on the loan.
Chapter 13 cramdowns
Chapter 13 cramdowns are most often applied to automobile loans. This is because cars usually depreciate in value after they are purchased. When car buyers who take out loans do not put a lot of money down, this depreciation usually results in negative equity. If a car loan is crammed down in a Chapter 13 bankruptcy, this negative equity is discharged along with any of the filer’s remaining unsecured debts when all of the monthly payments have been made.
Why do banks agree to cramdowns?
Lenders do not have to approve Chapter 13 cramdowns, but they usually do. This is because their only alternative would be repossessing the vehicle and sending it to an auction. A lender that refuses a cramdown would have to pay towing and auction fees, and the amount they ultimately recover would probably be no higher than the vehicle’s fair market value.
Free and clear
Many people struggling with unmanageable financial situations put off filing for bankruptcy because they worry about losing their cars or other secured assets. A Chapter 13 cramdown eliminates this fear because it allows an individual to make monthly payments that cover their vehicle’s fair market value. When all of their payments have been made, their auto loan’s negative equity is discharged. This leaves them with a car that has a free and clear title.