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Underwater Auto Loans in a Chapter 13 Bankruptcy

How Chapter 13 Allows Debtors to Modify Liens and Reduce Interest Rates, and the Potential Impact of the Covid-19 Pandemic

How Does a Chapter 13 Plan Impact Auto Loan Payments?

Unlike in a Chapter 7 bankruptcy, when you file under Chapter 13, you have the ability to keep your vehicle even if you are not current on the payments. For this to happen you must agree to pay off those missed payments during the course of your Chapter 13 Bankruptcy plan. In a Chapter 7 you are limited to reaffirmation and redemption to retain your vehicle. Of course, if you can no longer afford your vehicle, the process of surrender is available under both Chapter 7 and Chapter 13.

A Chapter 13 Bankruptcy may also allow you to reduce the overall balance on your auto loan, via what is known as the “cramdown option” which originates from 11 U.S.C. § 506 of the Bankruptcy Code. If your auto loan is underwater, you may be eligible to reduce the balance of the loan, stripping the balance down to the market value equity in your vehicle.

This option is limited by 11 U.S.C. § 1325(a)(9) in that 1) you must have used the auto loan to purchase your vehicle; 2) you received the auto loan more than 910 days before you filed your bankruptcy case; 3) the collateral for the auto loan is your vehicle; and 4) you must have acquired the vehicle for your own personal use. If the collateral for your auto loan consists of anything of value besides your vehicle, you must have received the loan within the one-year period prior to filing your Chapter 13 bankruptcy.

How Does a Chapter 13 Plan Impact Auto Loan Interest Rates?

Chapter 13 allows you to reduce the interest rate of your auto loan to the current market rate, thanks to a court ruling in Till v. SCS Credit Corp. (541 U.S. 465 (2004)). Under Till, the adjusted interest rate is set based on the current prime rate, adjusted upward to account for the additional risk of non-payment posted by lending to a bankrupt debtor. According to the Court, the size of that additional risk adjustments depends on factors such as the circumstances of your estate, “the nature of the security and the duration and feasibility of the reorganization plan.” In Maryland, the interest rate for a car loan is typically set by the courts between 3% and 5%.

How May the Covid-19 Pandemic Affect Auto Loan Payments and Refinancing?

Unlike mortgage and student loans, the recently-enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act does not extend pandemic-related benefits to auto loan borrowers. Due to the Covid-19 Pandemic, some sources estimate auto sales in the United States to decrease by 9% in 2020. Dealerships such as Ford and Hyundai are currently allowing customers who purchase certain new vehicles to defer their first payment for 90 days. Hyundai is also giving current customers up to six months of payment relief if the customer is suffering from layoffs.

The Covid-19 Pandemic is also likely to lower the market rate for used vehicles, along with the prime interest rate. Historically, economic downturns cause “knee-jerk” drops in pricing for used vehicles – during the Great Recession, 3-year-old vehicles lost nearly 10% of their value, whereas the year before the Recession used vehicles declined less than 5% in value. Since dealerships are typically only offering purchase incentives for new vehicles, the used vehicle market – including near-new used vehicles is going to see a significant decrease in value until the economy rebounds. Lower values of used cars, accompanied by lower interest rates, should make cramdown options available to more debtors and improve the outcome of cramdowns by “cramming” the principal equity value of the vehicle down even further and reducing interest on the vehicle down to a lower prime rate.

For those who already own vehicles, certain loan holders are already taking steps to shift to fully remote servicing. Rather than the hassle involved with lenders who only operate via faxes, emails, and physical documents, some auto lenders are shifting to a digital lending platform that allows their lending agents to send you a text message to link directly to your smart phone – no PC or laptop required. These digital platforms enable auto-fill for documents, easier document submission, ID uploads and verification, and electronic signatures.

In regards to financial assistance, one of your best options is to reach out to your auto loan lender directly. Pandemic-related assistance varies from lender to lender, though many are choosing to waive late fees and defer payments, though interest may continue to accrue during this deferral period. Lenders differ on how you qualify for aid, how long your payments will be deferred, and how late fees, interest, and credit reporting will work.

Has the Covid-19 Pandemic Caused You To Miss Car Payments or Affected Your Ability to Refinance Your Auto Loan?

The COVID-19 Pandemic has changed many aspects of all of our daily lives. During these difficult times, Wolff & Orenstein, LLC remains committed to assisting individuals and businesses facing financial hardship. Our firm has implemented remote operations and stands ready to provide experienced insight that you can trust whether you are weighing the possibility of bankruptcy or considering your options. Please call us at 301-250-7232 or contact us online to schedule an initial consultation by phone or Zoom video conference. We are here to help.

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*Resolved litigation to release federal and state liens on Debtor's principal residence in Silver Spring, Maryland and discharged over $90,000.00 of tax obligations.

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