In Chapter 13, debtors may substantially reduce monthly car loan payments by modifying the car loan either by reducing the loan balance to the fair value of the car, extending the time for payments, reducing the amount of the payments, or reducing the interest rate.

The most valuable tool offered to debtors in Chapter 13 to modify car loans is the car loan “strip down” or “cram down”. When the car loan is “upside down”, i.e., the value of the car is less than the car loan balance, the car loan balance can be reduced to the car’s fair market value, which then must be paid in full through the life of the plan (3-5 years depending on the debtor’s income). NADA average trade-in value is used to determine the value of a car in Middle District. Any remaining balance (the difference between the car loan balance and the value of the car) is then “stripped down” and treated as a general unsecured claim. See Classification of Creditors.

The strip down does not apply to under-secured (or “upside down”) personal car loans incurred within 910 day (about 2 ½ years) prior to the bankruptcy filing. Although the debtor is not permitted to change the principle amount due on such car loans, the debtor still may be able to extend the terms of the payment schedule, lower the interest rate to the current market rate, or cure defaults.

Furthermore, the strip down may not be allowed when the debtor has a non-filing co-signer on the car loan. In such cases, the creditor may object to the strip down or possibly seek compensation or repossession after the discharge. Sometimes, however, creditors may agree to the strip down, especially when the alternative is Chapter 7 for both the debtor and the non-filing co-signer.

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