Maximize Savings with Chapter 13 Cramdown | Bankruptcy Blog

Did you know that Chapter 13 bankruptcy has other benefits besides protecting nonexempt assets? For example, you might be able to pay off your car loan faster through the bankruptcy plan with what is known as a cramdown? In this blog post, I’ll discuss how it works and how it could potentially save you thousands of dollars.

Updated on February 13, 2025

Key Points:

• Chapter 13 bankruptcy allows you to keep your assets if they are not protected by your state’s exemptions.
• Payment plans for nonexempt assets in Chapter 7 bankruptcy lasts between ten to twelve months.
• A cramdown in Chapter 13 bankruptcy can significantly reduce your car loan balance, saving you thousands of dollars.

How Chapter 13 Bankruptcy Works with Nonexempt Assets

Chapter 13 bankruptcy is known as a wage earner’s plan, whereas Chapter 7 bankruptcy is known as a liquidation. While bankruptcy law applies the same to both chapters in bankruptcy, which chapter is best for you depends on the facts of your case.

For example, if your assets are not exempt or protected, the nonexempt portion can be paid back via Chapter 13. The bankruptcy payment plan for Chapter 13 bankruptcy is between thirty-six to sixty months. Here’s how exemptions work:

Suppose your car’s value is $20,000, and you owe $12,000. That means you have $8,000 in equity. Each state has varying amounts for exemptions, but let’s say your state’s exemption limit for motor vehicles is $5,000.

If you subtract the exemption amount, in this case $5,000, from the equity, which is $8,000, there is $3,000 in nonexempt equity.

That is the amount that belongs to the bankruptcy estate. At this point, there are several options to consider.

How to Handle Nonexempt Assets in the Bankruptcy Plan

When assets need to be protected because they are not exempt, what happens next ultimately depends on what you want to do with them. For example, in any Chapter 7 bankruptcy case, the nonexempt portion can be bought back from the bankruptcy trustee, and usually, the bankruptcy payment plan will extend between ten to twelve months.

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If you cannot afford to pay back the debtor within that time frame, the asset can be surrendered to the bankruptcy trustee. In this case, the trustee would sell the car, and the net proceeds would be distributed to the creditors listed in the bankruptcy petition.

That’s why it is essential to know the value of your assets and to what extent they’re exempt to avoid being put in the wrong position from the beginning. That way, you can proceed instead with filing Chapter 13.

Chapter 13 Bankruptcy Plan and Nonexempt Assets

With Chapter 13, the nonexempt portion could be paid back over thirty-six to sixty months. So, Chapter 13 bankruptcy can be filed because the debtor failed the means test since their income is too high, disposable income is available, or to protect nonexempt assets.

How to Pay off Your Car Loan Quicker with the Chapter 13 Bankruptcy Plan

Chances are you have never heard of a cramdown regarding bankruptcy. But the cramdown will allow you to pay off your car loan quicker, saving you thousands of dollars. This is how the cramdown works:

In the prior example, there was $8,000 in equity, and the nonexempt portion of $3,000 belonged to the bankruptcy estate. But let’s reverse those figures. In this case, suppose there is $8,000 in negative equity. This means you owe more on your car than what it is worth.

With the cramdown in Chapter 13 bankruptcy, the amount owed on the car loan can be reduced to the vehicle’s fair market value.

So, in our hypothetical, let’s say the car loan is $20,000, but the value is $12,000. The $8,000 negative equity can be reduced from the car loan, so now the balance is $12,000. Just like that, you have saved $8,000.

The $8,000 becomes unsecured debt in the bankruptcy payment plan. Unsecured creditors usually receive a minimal amount in the bankruptcy plan.  But, there are some restrictions to be aware of when it comes to cramdowns.

Requirements for a Cramdown in a Chapter 13 Bankruptcy

First, it’s essential to know that a cramdown is only an option for Chapter 13 bankruptcy, not Chapter 7. The vehicle must also be for your personal use, not a business.

Another requirement with a Chapter 13 cramdown is that you must have owned the car for at least two and one-half years, or  (910 days) before filing for bankruptcy.

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One crucial factor is that the car loan has to be paid off in total during the bankruptcy plan.

Therefore, in our hypothetical, while the Chapter 13 cramdown reduced the balance on the car loan from $20,000 to $12,000, the $12,000 must be paid before the plan is completed. Chapter 13 bankruptcy payment plans last between thirty-six to sixty months.

So if you cannot apply for a cramdown if you cannot afford to pay off the $12,000 car loan during the bankruptcy plan.

What Steps Are Required for a Chapter 13 Cramdown?

A cramdown is not automatic in a Chapter 13 case. Most cars have negative equity, so while the car loan lender, bankruptcy trustee, judge, and bankruptcy lawyer know that your car is upside down, court approval is still required.

This means a motion must be filed with the bankruptcy court, and the lender can object.

Do you have questions on a Chapter 13 cramdown? Then submit your question via e-mail to Alex@Bankruptcy.Blog, and if your question is accepted, it will be posted on the Reader’s Question forum.

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Please note that the information posted on this site does not constitute legal advice and should be used only for educational purposes.