Paying a car payment each month with interest you know is exorbitant can be agony. But did you know that you could use bankruptcy to lower your car payments? There are actually two different ways to accomplish a lower car payment by filing bankruptcy, and both are achieved by filing a Chapter 13. The first way is to lower the principal balance on your car loan to the value of your car. The second way to lower your car payment through a Chapter 13 is to modify the interest rate and extend the payback period to 5 years.
Reducing the Principal Balance of Your Car Loan
Most people know that cars are a depreciating asset – meaning they lose value over time. They are, ultimately, machines that wear down over time and become less valuable. You can use this depreciation to your advantage in Chapter 13 if you have a note on your car in which the balance due is more than the value of your car. Here’s a hint: most car note balances are higher than the value of the cars they secure. Cars depreciate rapidly – especially new cars. Through a Chapter 13 Plan, you can “cram down” the principal balance on your loan to the value of your car. For example, if you owe $20,000 on a car that’s worth $12,000, you can “cram down” the creditor’s principal balance to just $12,000.00.
You can lower the principal balance of your car loan through a Chapter 13 if your situation matches one of these four scenarios: 1) the car note was taken out more than 910 days prior to filing for bankruptcy; 2)the car is used only for business; 3) the car is driven only by someone other than you; or 4) the vehicle merely secured another personal loan. Even if you don’t fall into one of these categories, there’s still another great way to save major bucks on your loan through a Chapter 13.
Reducing the Interest Rate on Your Car Through Chapter 13
If you financed your car within 910 days of filing Chapter 13, you can’t reduce the balance of the loan, but you can significantly adjust the interest rate. I’ve crammed down the interest rate of dozens of clients’ car notes from as high as 29% to as low as 5.25%. A few years back, the Supreme Court came up with a concept called the Till rate of interest, which is equal to the prime rate of interest plus a minimum of 1.5%. This means that you could potentially lower your interest rate to 5.25% since the prime rate was recently increased to 3.75%. For instance, if your current car note’s balance is $20,000 at 19% with 5 years left on the note, lowering the interest rate to 5.25% through a Chapter 13 will lower the payment to $379.72. The results are even more drastic if you have less than five years left on your car note because all payments through a Chapter 13 plan can be stretched out to five years.