How does Chapter 13 Bankruptcy affect your auto loan payment?

A few things to keep in mind before we talk about this subject: (1) in a Chapter 13 bankruptcy the debtor pays the value of all non-exempt assets to unsecured creditors and (2) most secured debts will need to be fully paid in the plan. Also note that many Chapter 13 cases do not end with a discharge. Sometimes this is because the debtor’s financial circumstances change. Okay, let’s look at a few questions relevant to the topic at hand.

How interest rates are determined in Chapter 13 bankruptcy depends on something called the Till rate. But what’s the Till rate?

In Till v. SCS Credit Corporation, 541 U.S. 465 (2004) (“Till”), the Supreme Court of the United States (“SCOTUS”) adopted what is known as the ‘formula approach,’ or Till rate, which is simply the current prime rate + a modest adjustment to account for the risk of default. Although Till remediates some of the predation inherent in subprime financing, like all good things it can create new problems for debtors looking to get their Chapter 13 plan confirmed.

Will the creditor object if their subprime note gets crammed down?

They might object in a few different scenarios. If you bought the car within 910 days of filing for bankruptcy, they could object citing 11 U.S.C, 1325(a), which is the fabled anti-cramdown rule. This is a 910 claim and it could lead to you paying the contract rate, if it’s greater than the  aforementioned Till rate. Otherwise, they might object if your prepetition interest rate was 22% and your proposed plan rate is simply the prime rate, or if you proposed the prime rate plus a hard-to-justify risk premium. In other words, the note holder will likely object if they have a valid 910 claim–e.g. when the debtor owns the car for fewer than 910 days before filing for  bankruptcy.

Will the creditor object if their market rate note gets crammed down?

That depends. What happens when you’ve owned the car for three years and have five years remaining on the note? Under this fact pattern, a creditor might actually be happy to go with the Till rate if it’s higher than a pre-petition rate since they could get a higher payment. In this instance, the plan actually hurts the debtor more than it helps, and it also reduces the lender’s risk since the trustee can intervene to get the creditor paid. The creditor is unlikely to object.

But what if you only have one year remaining on the car note? Again, we’re assuming you’ve  owned the car longer than 910 days before filing. Here, those twelve remaining payments could turn into sixty payments which hurts the creditor. Although the Till rate ensures that the creditor will get more money in the long run–at least as things stand here in 2023–there is now more risk because the debtor might not succeed in making all their plan payments. Will they object? Maybe. Maybe not, since they’d need a good faith basis upon which to object.

What if the debt is a personal loan from a credit union secured by a car, but is not otherwise an automobile loan?

This is where credit unions can get really burned. I know about a recent bankruptcy example where the debtor owed nearly $10,000 on a personal loan, which was secured by their car worth $3,000. Had the debtor filed Chapter 13, they would have paid $3,000 (the value of the collateral) plus the Till rate. The same could happen with a traditional auto loan, assuming an antecedent debt is rolled into a new loan. Also note that in a Chapter 7, surrendering the collateral is sufficient to discharge the entire debt–both secured and unsecured. 

Okay, so these are just a few of the questions relevant to cramdowns in Chapter 13. Always a  good idea to consult a bankruptcy lawyer about your options if any of this applies to you.