Will bankruptcy help me lower my car’s interest rate?
The short answer to that question is sometimes. You cannot lower your interest rate in a Chapter 7.
If your vehicle is underwater or has no equity you have the option to surrender the vehicle to the lender and find another vehicle. There is also another option called redemption which allows you to file a motion to reduce the principal balance. For example, if you owe the lender $50,000 and your vehicle is worth $35,000 you can reduce the principal balance to $35,000 and refinance with another company.
In a Chapter 13, this is called a “cram down”. However, you would need to have owned the vehicle over 910 days prior to filing bankruptcy to be eligible for a “cram down”. A Chapter 13 will allow you to lower your vehicle’s interest rate. This is only a practical solution if you need to file a Chapter 13 for other reasons – like you are paying back mortgage arrears or you’re over the income threshold to file a Chapter 7.
You can also file a motion to value secured property to reduce the interest rate. The interest rate used is called the “till” rate . It’s usually 1% higher than the federal prime rate to account for a possible default. If the federal prime rate is 6.25% then till rate would be a least 7.25%.
There is also a trustee fee of 10% , so unless the federal prime interest rates are very low or you are paying a very exorbitant interest rate, its usually cost prohibitive.
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