How would you like to reduce your car payment, by lots?
In a recent case, Chapter 13 allowed my client to save $7000 off the loan balance based on an examination of the car finance contract.
You couldn’t see the issue from the monthly statement.
When I got the finance agreement itself, I found the bombshell that
Included in the loan for the new car was the unpaid balance on their old trade in!
In bankruptcy-speak, that’s negative equity, and negative equity isn’t entitled to payment in full in Chapter 13.
So in our Chapter 13 plan, we can reduce what they pay for the car by the $7000 of the loan that paid off the trade-in. It really was worth the effort to find the contract.
Sleuthing in bankruptcy
I know, the amount of paper a diligent bankruptcy lawyer wants from you is daunting.
There’s loan documents, deeds, IRA statements, bank balances, insurance policies, pay stubs, and tax returns.
It can seem overwhelming and sometimes pointless. I get it.
Some of what we’re gathering is defensive: to show that the information in your bankruptcy schedules is correct. After all, disclosure is the price of getting a bankruptcy discharge.
But some of the paper we need supports our offense: having found the portion of the car loan that related to the trade in rather than the new car, we can slice $7000 off of the debt and reduce the car payment.
Same thing about getting payroll tax returns. Not everything a small-business employer owes the IRS is a must-pay. But we’ve got to get the right paper to figure that out.
Just believe that we are asking for documents for a real reason. Like reducing the loan by $7000.
Car loans in bankruptcy
The auto side of this story is worth the telling, too. The ability to manipulate car loans is one of the appealing features of Chapter 13.
Only purchase-money: After the 2005 bankruptcy amendments, car lenders got a windfall on cars purchased in the three years, more or less, before the bankruptcy. “Reform” entitled car lenders to more than their collateral was worth. (The lenders had a bigger lobbying budget than consumers when the law was passed).
But the 9th Circuit judges have held that the negative-equity part of a car finance transaction isn’t part of the purchase money loan. Thus we can strip out the payoff of the trade-in from the loan balance that must be paid.
Likewise, a debtor can reject gap insurance, maintenance contracts and other add-ons that aren’t part of the value of the car itself.
Interest rate changes: Regardless of when a car loan was made, Chapter 13 can alter the interest rate that the lender gets on the loan through Chapter 13. So the 10-15% car loan may pay something closer to 4-5% under the Chapter 13 plan.
Term extended: A Chapter 13 plan can extend the remaining term of a car loan to match the length of the bankruptcy case. Spread over more months, the monthly bite of a car loan in your budget can be reduced.
And that’s just a part of the reason that I love Chapter 13.
