Bankruptcy Myth of Non-dischargeable Car Loans

I have heard from two different people looking for relief from their debt that they thought they could not discharge their car loan debt in a Chapter 7 bankruptcy. In fact, one person said they had consulted an attorney on this very issue and they were told they could not discharge their car debt in a Chapter 7 even though the vehicle was already repossessed. The source of the myth is one of the reforms that occurred to the bankruptcy code in 2005. The change was that if you had purchased a vehicle within 910 days (about 2.5 years) prior to filing your bankruptcy petition, that purchase money debt secured against the vehicle could not be “crammed down” or “stripped down”.

Cramming down (or stripping down) a debt is where the amount of the debt secured against property, such as a car, is reduced to the value of that property on the date of filing the petition. For a car, you may owe $15,000.00 but the vehicle is only worth $10,000.00 in order to keep the vehicle. That debt could be crammed down so that you would have to reaffirm (agree to pay) only $10,000.00. Under the old law, the $5,000.00 debt above the value of the car is discharged in a Chapter 7. The change in the law prevents this from being done on cars purchased within 910 days. Now, with recently purchased cars, you either have to pay the entire purchase price or surrender the car.

However, what did NOT change is that the debt of a car loan can be discharged. If your car was repossessed or if you surrender it, then the whole remaining debt will be treated as unsecured and will be dischageable. If you keep your car and the purchase was more than 910 days before the petition, the unsecured part of the debt (the amount over the value of the car) will be discharged and you pay the value. Regardless, the debt of a car loan can be discharged in a Chapter 7.

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