Bankruptcy / Chapter 13 / Vehicle Interest Rate

How A Chapter 13 Bankruptcy Can Lower Your Car's Interest Rate

Written by Ascend Team
Updated Apr 25th, 2024
This article is for informational purposes only. Ascend does not provide legal advice, and are not attorneys. If you'd like to speak with a bankruptcy attorney that serves your city, you can speak with one in a free consultation.

You are considering filing for Chapter 13 bankruptcy and wonder whether your vehicle's interest rate or balance may be lowered. Chapter 13 bankruptcy can provide debt relief in many ways, potentially including:

  1. Lowering your car’s interest rate
  2. Lowering your car’s balance.

Before we get into all of this, let’s go over Chapter 7 and Chapter 13 bankruptcy. Chapter 7 bankruptcy, is considered a “liquidation” bankruptcy. Chapter 7, will discharge most of the unsecured debts you have. The trustee will help to sell any certain properties to pay off to your creditors. What Chapter 13, otherwise known as “wage earner”, will do is help reorganize all your debt so it will be easier for you to repay some of your loan for a certain amount of time. 

In Chapter 7, you don’t have access to this benefit. For example, if you were to file for Chapter 7, your car loan would not be discharged from you since it is considered a secured debt. This means, that your secured creditors who also possess your car loans must make you sign an affirmative agreement. The affirmative agreement is done between the creditor and debtor that relinquishes the discharge of debt in your pending bankruptcy proceedings. The only way you can hold onto your vehicle is by signing the agreement. You have to make sure you keep up with your monthly payments. If not, the creditor is able to take away your car at any time.  

Though there is a way from Chapter 7 that could help lower what you still owe on the car. You can do this by redeeming your rights to your vehicle. If you were to redeem your vehicle you can pay an equal amount of its replacement value for it. This will help decrease what you still owe from your loan. The only side effect to it is that you will have to pay in a lump sum. This may be hard for many people because not many who file for bankruptcy have enough money to pay upfront like that. 

In Chapter 7, you don’t have access to this benefit. Let’s dig into how Chapter 13 may help you.

Understand Car’s New Interest Rate

Chapter 13 may just be the best solution to help lower your car payment. So if you were to file for Chapter 13, it will become part of your bankruptcy plan and it will be paid by your trustee. In many situations, the car payment could stay the same but your interest rate will decrease. As well as be able to potentially reduce the principal balance of your car loan. Only if your value of the car is less than the balance still owe and if it was bought 910 days before filing Chapter 13. Which is also referred to as a “cram down”. Cramdown is when the balance of your loan is more than what your car is. That way you are able to pay back the balance based on the current value of the contracted loan. Therefore will be able to lower the amount and payment you still need to continue to owe.  

How Much Can You Save?

Let’s say you have a vehicle where you owe $20,000 at a 19% interest rate with 48 months remaining. You will have paid $8,704.00 in interest in that time frame. 

Let’s say you add the vehicle to a Chapter 13 payment plan at a 4% interest rate. You would now only pay $1,676 in interest.

Thus, you would be saving over $7,000 in interest in this scenario!

You can use this free calculator to estimate how much you would save in interest.

Understand How the Car’s Balance can be Lowered

There’s a bankruptcy option to help lower your car payment which is known as a cram-down. Cramdown is known as a court making a creditor accept certain terms of a loan in a bankruptcy proceeding. It is known for being used during Chapter 13 proceedings to lower debt that still needs to be paid to a creditor. For instance, if a person purchased a vehicle that costs $30,000 with a loan, the loan could gain interest and the overall loan would start to increase. Cram-down would be able to lower the debt above $30,000 down to $30,000. Though you should know that cramdown is not meant to be used for a mortgage on a person’s dwelling. 

You should also learn and understand the 910-Day Rule. If you plan on trying to cram down your loan, you have to have at the loan for more than 910 days before you have filed for Chapter 13. Therefore you would have to have had the loan for about two and a half years.  This is purposely done so that way it cannot be used on newly bought cars. So if 910 days have not passed yet, you won’t be able to cram down your loan and reduce your payments. 

Cramdown can only be done under Chapter 13, not Chapter 7. You have to file a Chapter 13 under “adjustment of debt”. Within your payment plan, the process and term would last for about a 3-5 year Chapter 13 payment plan. During the process, you must show the value of the car, which will help indicate the secured part of your loan balance. Also, what is the remaining unsecured part and how much do you plan on paying for each part of it?