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Experience:  Attorney in the practice of Bankruptcy Law since 1996
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I need to file bankruptcy in California. I want to keep paying

Resolved Question:

I need to file bankruptcy in California. I want to keep paying on my car but would like to lower the payments but obviously I have bad credit. Is there a way to do this with the bankruptcy?
Submitted: 1 year ago.
Category: Bankruptcy Law
Expert:  cfortunato replied 1 year ago.

cfortunato :

Hi - my name is XXXXX XXXXX I'm a Bankruptcy and Consumer Protection attorney here to assist you.

cfortunato :

Under certain circumstances, filing a Chapter 13 (not a Chapter 7) Bankruptcy can result in lower car payments.

cfortunato :

1) How long have you had the car loan?

cfortunato :

2) What is the current market value of the car?

cfortunato :

3) What is the balance on the car loan?

Customer:

1) Ihave had the car for 2 years

Customer:

I have had the car for 2 years

Customer:

i owe 22000

Customer:

market value is 1600

Expert:  JoeLawyer replied 1 year ago.

HiCustomer

In Chapter 13, you can often "cram down" a car loan, meaning you only have to pay what it is worth, not what you owe, and the difference is discharged by the bankruptcy. You can also often improve your interest rate, since in Chapter 13 you get what is called the "Till" interest rate, which is about 1% over prime rate. It is called the "Till" rate since it was the In re Till case that established this interest rate for Chapter 13.

However, whether or not you can cram down the value depends on a couple of things: if the loan is a "PMSI" loan (purchase money security interest loan), meaning you got the loan to buy the car, then you can only cram down the value if you have had the loan at least 910 days (i.e. about 2 1/2 years).

But, if the loan is a "non-PMSI" loan (non-purchase money security interest), meaning you owned the car outright then used the title as collateral for a loan, then this 910 day rule does not apply and you can cram down the loan in Chapter 13 anytime after getting the loan.

So, if a person has a car loan they got 2 years ago on which they owe $22,000 but the car is only worth $1,600, then in Chapter 13 that person would only have to pay $1,600 at the Till interest rate (about 4.25% today) IF the loan is a non-PMSI loan. If the person got the loan to buy the car (PMSI), then that person would usually be better off to wait another 6 months until the 910 days have passed since they got the loan before filing Chapter 13, so that the person doesn't have to pay $22,000 for the car in the Chapter 13.

Another option is to file Chapter 7 and file a Motion to Redeem under 11 U.S.C. 722. This does NOT require the loan be at least 910 days old, so it can be done anytime and the vehicle can still essentially be crammed down. But, the person does NOT get the Till interest rate, and has to come up with the money for the redemption all at once. Also, the car must be used for personal or household use and not for business. For example, if a person has a car loan on which they owe $22,000 but the car is only worth $1,600, and this car is the person's personal car, not a business vehicle, then during the Chapter 7 case, that person can file a Motion to Redeem pursuant to 11 U.S.C. 722 and ask the court to order the creditor to accept $1,600 as full and final redemption of the vehicle. The creditor has the opportunity to object to the Motion if they believe the car is actually used for business purposes, or if they believe the value the debtor placed on the car is too low. Either way, as long as the court does not decide the car is used for business purposes, the court will determine what it believes the accurate value of the car to be, and then the court will order the creditor to accept that value in a single, lump sum payment from the person, usually due in about 30 days. So, the person would give the creditor a check for $1,600, and the creditor would have to tender title to the person, and the remaining balance on the car would be discharged by the Chapter 7.

The catch is coming up with the $1,600 in a lump sum; tough to do without having a retirement account you can pull it out of or without a rich uncle. You can't come up with the money before filing the Chapter 7 (such as holding a tax refund check) since any cash you have on the day the bankruptcy is filed has to be turned over to the Chapter 7 trustee to give to creditors, so the money has to be pulled together after the Chapter 7 is filed. You are allowed to go get a loan after the bankruptcy is filed to come up with the $1,600, but it would probably be at a high interest rate. One company that gives such loans as long as the car isn't too old or have too many miles, is 722 Redemption Funding, whose website it here: https://www.722redemption.com/home.php.

Or, if you can find another company to give you a loan, borrow it from a family member, get it from a retirement account, life insurance policy, home equity loan, etc, then those will often work also.

I hope this helps!

Thanks,
Joe

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Category: Bankruptcy Law
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Experience: Attorney in the practice of Bankruptcy Law since 1996
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