What Is a Cramdown Auto Loan During Bankruptcy?



A cramdown is a process that helps borrowers save money during Chapter 13 bankruptcy. Here’s how it works and how to qualify.

Chapter 13 Cramdown Defined

A collapse in Chapter 13 bankruptcy occurs when you reduce the amount you owe the lender to the fair market value of the vehicle. This adds your car’s negative equity (the amount you owe that exceeds the value of the vehicle) to your unsecured debts in bankruptcy. Unsecured debt typically includes credit card balances, medical bills, and personal loans.

At the end of the deposit, you can only pay a percentage of the negative equity of the vehicle or maybe none of that, which can save you a decent amount of money in your bankruptcy repayment plan and on your car loan.


You owe $ 15,000 on your car loan, but your vehicle is only valued at $ 10,000. If an escalation is approved, you owe the lender the $ 10,000, and the remaining $ 5,000 is added to your other unsecured debts.

Chapter 13 bankruptcy is a long process, lasting three or five years. Your loan balance is included in your Chapter 13 repayment plan. Usually, after bankruptcy ends, you end up owning the vehicle with complete freedom.

In some cases, reducing your car loan allows you to lower your interest rate to make payments more affordable, or even extend the term of your loan. During a tightening, you may have the option of changing your interest rate to the prevailing prime rate, which can help you save even more money on the vehicle. If you extend the term of your car loan to meet the bankruptcy deadline, you could end up with a lower car payment.

Qualifying for a Cramdown

A cramdown is only available to borrowers who file Chapter 13.

If you file Chapter 7 bankruptcy liquidation, it means that your non-exempt assets are sold to pay off your creditors. Chapter 13 is repayment bankruptcy where your court appointed trustee works out a repayment plan that allows you to repay your creditors as much as you can based on your disposable income, which is why a squeeze is an option.

Here are the requirements for a cramdown:

  • Your Car Has Negative Equity – In order to reduce the loan, your vehicle must have negative equity, which means you owe more than it’s worth.
  • You have owned the vehicle for at least 910 days – It is necessary that you have had your vehicle for at least 910 days (or two and a half years) before filing for bankruptcy in order to resort to escalation. According to the legal site Nolo.com, this rule was created to prevent borrowers from buying a vehicle and then immediately filing for bankruptcy to pay off part of the balance.
  • Payment for your car is included in your repayment plan – You may have had the option of not including your car loan in your bankruptcy. If you choose to opt out, you cannot reduce the loan.

Do you think your vehicle is eligible? Talk to your court-appointed trustee about your options. You usually need to do a cramdown early in the process, as the refund for the cramdown vehicle is included in your refund plan.

Not eligible for a Cramdown?

If your vehicle does not qualify for a reduction, but you need a more affordable vehicle or loan, you may be able to sell your car and get something more affordable.

In Chapter 13, there is a process that allows you to finance another car if deemed necessary. However, not all lenders can help borrowers in active bankruptcy – subprime lenders may be able to help, however, and here at Auto Express Credit, we know where to find them.

Subprime lenders are registered with special financing dealers. If you need a car loan during bankruptcy, fill out our free auto loan application form and we’ll find a special financing broker in your area. There is never an obligation to be matched, and our form is quick and easy.


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