If you have a loan out on your vehicle that is more expensive than what your vehicle is currently worth, there are a few options that you can use to get a fresh start. In this blog, we explain how a cramdown or redemption auto loan might be able to help you reduce your payment amount.
Redemption Auto Loan
If you file a Chapter 7 bankruptcy and want to keep your vehicle, there are two options available for you: reaffirmation and redemption. Reaffirmation is a formal agreement to repay your loan as though you never filed for bankruptcy. Although not as common, redemption can be helpful when you owe significantly more than what your vehicle is presently worth.
Under redemption, you are able to get rid of your existing loan by paying the current fair market value of your vehicle. However, the current value will need to be paid to your lender in one lump sum. To successfully redeem your vehicle, you will need to:
- Figure out the appropriate value of your vehicle
- Have the vehicle lender agree to the new value or negotiate a reasonable value
- Get a judge to decide the right value if you and the lender can’t come to an agreement
- Pay the entire agreed on or court-ordered amount within a specific time-frame
Although you will need to come up with the money to pay off the loan at once, redemption can end up saving you a significant amount of money. By clearing the entire balance of your loan and only paying the current value, you can save thousands of dollars. Your savings are actually increased if you have a high-interest loan since you will avoid paying the interest over the life of the loan.
Cramdown Auto Loan
If you still want to keep your vehicle, but you are unable to obtain the necessary funds to pay the fair market value or qualify for a redemption loan, you should consider a cramdown loan. By filing a Chapter 13 bankruptcy “adjustment of debts,” you can essentially re-write your current auto loan.
Cramdown will allow the payment terms of your loan to be rewritten based on the secured portion of your debt. This can make your new monthly payments significantly less than your original payment plan. The number of your monthly payments can usually be stretched out up to 60 months. However, more interest will accrue if your debt takes longer to pay. In some instances, cramdown allows the interest rate on the loan to be lowered, especially if the contract interest rate is high.
Are you struggling to keep up with your auto loan payments? We can help you today. Contact our Worcester team of loan modification attorneys to schedule your free case evaluation.