Chapter 13 bankruptcy in Texas restructures secured debts into a payment plan and discharges unsecured debts. A secured debt involves collateral, which gives the lender the right to repossess for defaulted loans. Auto loans are commonly secured debt, and buyers could lose the vehicle for missing payments. A debtor may be able to save money on auto loans with a cramdown.
What is a cramdown?
A cramdown allows the debtor to reduce the owed amount to the Actual Cash Value. For example, if a person owes $10,000 but the vehicle is worth $7,000, the cramdown will enable them to only pay $7,000. They can work with the trustee to get a cramdown, but the debt has to exceed the vehicle’s value. The debt then gets transferred to unsecured debt. Vehicles with positive equity do not qualify.
In some cases, the debtor has to meet extra criteria for a cramdown. In addition to being upside-down on the loan, they must have owned the vehicle for 910 days, filed for Chapter 13 bankruptcy and included the auto loan as part of the bankruptcy. The reason debtors must own a vehicle for 910 days is to stop them from getting a loan just so that they can get it discharged through bankruptcy.
When a debtor does not qualify for a cramdown, they may be able to sell the vehicle to get rid of the negative equity. Even if they have bad credit, they could seek a loan from a lender that allows borrowers with low credit scores.
Chapter 13 bankruptcy is one way for a debtor to start over when they see no other way out. A bankruptcy attorney may be able to work with a debtor on getting started.