Using Chapter 13 Bankruptcy to Lower Your Car Interest Rate

Many debtors seeking bankruptcy as a means to keep their vehicles can benefit from 11 U.S.C. Section 506, which allows debtors to lower the balances on their car loans and lower the interest rates on the loans as well. 

Lowering Interest Rates in Chapter 13 Cases

When crafting a repayment plan in a Chapter 13 case, the bankruptcy code allows debtors to lower their contractual interest rates.  Pursuant to a case known as Till vs. SCS Credit Corporation, the U.S. Supreme Court determined that a reasonable interest rate for repayment of a secured car creditor is the prime interest rate plus 1% to 3%, depending on whether the interest rate adequately compensates the car creditor. 

What this means is that if you have a car loan with, say, a 21% interest rate based on the purchase agreement, you may file a Chapter 13 case in Georgia and propose to reduce the interest rate to about 5%.  That’s because the prime interest rate right now is 3.25%.  Add in the adjustment percentage of between 1% and 3%, and you’re probably good to get the 5% rate of interest in the bankruptcy case.

Lowering the Balance of a Car Loan in Chapter 13 Cases

The same bankruptcy law allows debtors filing Chapter 13 to reduce the balance of a car loan to the fair market value of the vehicle; however, the reduction is only allowed for cars purchased more than 910 days before the filing of the bankruptcy case. 

Let’s say you bought a 2008 Toyota Corolla on May 1, 2008 and you want to file bankruptcy today.  You borrowed $17,000.00 at a 15% interest rate and still have a balance of $14,000.00.  The fair market value of the car according to NADA is $11,000.00.  If you filed Chapter 13, you could propose a repayment plan to reduce the balance to $11,000.00 and reduce the interest rate to 5%. 

If you are struggling with making car payments or under the threat of repossession because you cannot pay your car, Chapter 13 is a viable option, especially if you’re currently paying a high interest rate for your car loan.  Of course, everyone’s financial situation is different, so consulting with a qualified bankruptcy attorney is a crucial step in determining if Chapter 13 bankruptcy is right for you.