What happens when I owe more than my car is worth?

As soon as you buy a car or truck, it begins to depreciate. Thus, it is very common for vehicle owners to owe more on their vehicle than the vehicle is worth, especially if they took out a high-interest-rate loan, put only a little amount down or paid more than the vehicle was worth. Borrowers who owe more than their car is worth may feel as though they are stuck with the vehicle, even if they no longer want it, because selling it will not provide enough money to pay off the loan. Filing for bankruptcy may be able to provide some relief to these borrowers.

By filing for bankruptcy, a borrower can consolidate their debts and, with the court’s help, work out more favorable terms for many of their loans. This process, called a cramdown, is very common for auto loans in which the borrower owes more than their car is worth. Notably, cramdowns are only available through a Chapter 13 bankruptcy.

For example, if someone purchases a new car for $40,000, putting $10,000 down, that vehicle may only be worth $20,000 after two years. However, the remaining loan balance after that two-year period will likely be greater than $20,000. For the purposes of our example, assume the remaining loan balance is $26,000. In this case, the borrow owes $6,000 more than the car is worth, so even if they sell the car, they must contribute an additional $6,000 to pay off the balance of the loan. In this situation, only $20,000 of the car’s value is “secured,” because the remaining $6,000 exceeds the value of the vehicle.

In this situation, a cramdown can help by restructuring the loan. For example, a borrower could propose that the loan value be reduced to the vehicle’s current value ($20,000), converting the remaining $6,000 to an unsecured loan. The unsecured loan for $6,000 would be lumped together with all other unsecured debt. The borrower may also be able to renegotiate the terms of the loan to obtain a lower interest rate. In most cases, court use a rate that is slightly higher than the prime interest rate, which is likely significantly lower than the original rate offered by the lender.

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