If a car was purchased more than 910 days prior to the date a chapter 13 bankruptcy case is filed and the car is worth less then what the bank is owed, the debtor should be able to change the amount it pays the creditor on the car in the chapter 13 case as follows:
1. Instead of paying the full loan amount, the debtor can pay the bank the value of the car over the length of the chapter 13 plan.
2. Instead of paying the original interest rate, the debtor can pay the bank the “prime plus rate” or the national prime rate plus a specific rate adjustment for risk of non-payment. (hovers at around 4.5 to 5.0% now) See Till v. SCS Credit Corp 541 U.S. 465, 124 S. Ct. 1951, 158 L.Ed.2d 787 (2004). (Can the debtor cram down the interest rate on a car purchased within 910 days? a topic for another entry)
3. The unsecured portion of the debt is treated as any other unsecured debt and shares in the funds set aside for unsecured creditors, an amount that may be very small.
The ability to file a chapter 13 bankruptcy and thereby change the treatment on a car loan, can be a major benefit to a debtor who has a steady income and an upside-down vehicle.