Equity in Cramdown

[TurnThePage]

So what happens to the "equity" in a vehicle cramdown if one chooses to dismiss a Chapter 13, or convert it to a 7?

[TurnThePage]

As a hypothetical, let's say I reduce a $45,000 car loan to the replacement value of $25,000 (secured in the cramdown). I make payments to $24,500 but then decide to dismiss the Chapter 13 bankruptcy, or I convert to a Chapter 7 .. What happens to the car and / or the equity with the previous payments?

[justbroke]

If you dismiss a Chapter 13 case without receiving a discharge, that cramdown bounces back to full value. If you mean what happens to your payments... that depends. The creditor would be allowed to tack on all accrued interest and attorney fees. This would likely make your $24,500 in payments worth a lot less toward the equity.

The car is also depreciating over the term of the Chapter 13, so it won't be worth $45,000 and may not even be worth $24,000. From my math, $45,000 - $24,500 = $20,500. If you've been in a Chapter 13 for 3-4 years and dismiss, it's quite possible that a.) the vehicle is worth less than $20,500 and b.) the accrued interest, fees and attorney fees, added back, would mean you still have negative equity.

For a Chapter 7, you'd probably need to do a reaffirmation or a redemption to fix the problem. I had to do a redemption but it saved me money overall. The issue with the redemption will be whether you have any equity in the vehicle (remember you still owe $45,000 - $24,500). The nicer thing about conversion is that you don't get hit with penalties because it's technically the same case (filing).

Just my thoughts on this. I haven't had to dismiss a Chapter 13, but I did do a conversion.

[despritfreya]

. . . I reduce a $45,000 car loan to the replacement value of $25,000. I make payments to $24,500 (or even the full cramdown amount of $25,000) then dismiss the Chapter 13 or convert to a Chapter 7 . What happens to the car?"

The car will be repossessed if you dismiss.

If you convert, it will be repossessed unless you bring the account contractually current and then sign a reaffirmation agreement, assuming the lender is willing to let you reaffirm. Redemption is not possible as the vehicle was not "intended primarily for personal, family, or household use" as required under 11 USC 722.

Des.

[TurnThePage]

Thanks JustBroke and Des! Valuable insight, as always -- although I find it strange that a Chapter 7 doesn't provide a redemption provision for a business item / cramdown. Would the equity not be protected, for instance, in doing a Chapter 7 conversion and utilizing a "wildcard" or Homestead exemption?

[despritfreya]

Would the equity not be protected, for instance, in doing a Chapter 7 conversion and utilizing a "wildcard" or Homestead exemption?

Exemptions have nothing to do with lien rights when those lien rights are consensual (and, for bk purposes, not avoidable). For example, Florida's homestead exemption is unlimited but, if one does not pay their mortgage, the lender forecloses. If a homestead exemption were to stop this, no one would own homes because no lender would lend.

Hope that helps.

Des.

[TurnThePage]

Thanks Des -- Roger that. Seems the only way to "redeem" this vehicle in a Ch. 7 conversion would be to let the creditor repossess it, and then buy it at auction. The rest of the note would be discharged, but seems illogical that all the previous payments in a 13 would be forfeited.

[despritfreya]

seems illogical that all the previous payments in a 13 would be forfeited.

Not illogical and payments are not "forfeited". Your Chapter 13 Plan is a contract. However, if you breach the contract you suffer the consequences. Once out of the Chapter 13, your obligation defaults back to the original contract. The money you paid is applied to the original contract, which, in all likelihood, does not bring the account current. If you don't bring payments contractually current you do not keep the lender's property.

Des.

[TurnThePage]

The money you paid is applied to the original contract .....

Des.

Ok. That makes sense. I was under the impression that the payments would reset to 0 if I dismissed a Chapter 13.