How Much Can The New Interest Rate Help You Save?
Tens or hundreds of thousands. Assuming you have a vehicle, your outstanding balance is $20,000, at 19% over 48 months. If you had not filed for bankruptcy and proceeded on these terms, you would have paid $8,704 within 48 months. If you file bankruptcy, your car loan is added to your Chapter 13 payment plan, and the interest is reduced to 4%, you will pay a total interest of $1,676. You would have saved more than $7,000 in interest.
Are you curious to see how much you can save in interest? Use this free calculator.
Can I Lower My Car Payment in a Chapter 7?
When you file for bankruptcy, you can either file Chapter 7 or Chapter 13. The former is also known as liquidation bankruptcy because the trustee will sell some of your assets to pay off your unsecured creditors. The latter is popularly referred to as a 'wage earner' because it is a better alternative for someone with some income that they can use to repay their debts. Chapter 13 works by reorganizing your debts to make it easier to repay them over three to five years.
Under Chapter 7 bankruptcy, you do not have any benefits pertaining to your car loans. Assuming you file Chapter 7, your car loan will not be discharged because it is a secured debt. It's important to understand how Vehicle appraisals work. Your secured creditors, like your vehicle loan with the car as collateral, will ask you to sign an affirmative agreement.
An affirmative agreement is an understanding between a debtor and a creditor that surrenders the discharge of the debt in bankruptcy. You will need to sign the agreement to retain the vehicle and ensure you make your monthly payments as agreed. Failure to which your lender can take away the car.
However, Chapter 7 can still help you lower the balance on your car. You can redeem the rights to your car, which means you will pay an equal amount of the car's replacement value. Therefore, you will have reduced the balance from your loan. If you proceed with this, you will need to pay the lump sum, which might be hard considering your financial situation.
Three Things You Need to Know to Lower Your Car Balance
From the above example, you can do it by lowering your interest rate, and you can saving. There are three things you need to know:
- Cram down- it is the court order that makes a creditor accept new terms of a loan in bankruptcy. It is majorly used in Chapter 13 to lower debt, and you can use it to lower your car loan. If you had bought a vehicle and owe $30,000 to your creditor, it could gain interest and start to increase. Cram down can lower your debt from above $30,000 to the initial $30,000. Note that cram down is not used on a mortgage.
- The 910-Day Rule—If you want to lower your car balance, you should wait more than 910 days before filing for Chapter 13 bankruptcy. Otherwise, you cannot cram down the loan or reduce the balance.
- It is only possible under Chapter 13. If you choose to file Chapter 7 bankruptcy, you will not get this benefit. Even in Chapter 13, you need to demonstrate the car's value to show the secured bit of your loan balance, the unsecured part, and how much you will pay for each part.
