The 910 Day Rule in Bankruptcy

If you have been financing your car for over 910 days (two and a half years) you may be able to reduce the principle owed to the fair market value in a chapter 13 bankruptcy case.

The pride of owning a new car is exciting, but not everyone needs, wants or can even afford a new car.  In fact, a great opportunity might be right under your nose.  What if you could pay off what your car is worth rather than what you owe on it?

It may be more possible than you think.  Changes made under the 2005 Bankruptcy Reform Act have created an attractive opportunity for people who have been financing their car for greater than 910 days and who are upside-down in equity on their car.

Your Car in Chapter 13

If you have a vehicle financed within 910 days of a Chapter 13 Bankruptcy filing and you wish to keep your car, the entire balance of the loan must be paid back through your Chapter 13 plan.  Although you will most always have the opportunity to surrender the car if you choose to keep it, you must remain current on the payments.  Otherwise, you’ll be in default and the creditor will have the option to repossess the vehicle based on the delinquent payments.

Lowering the Principle on Your Car Note

However, for finances over 910 days old there is attractive alternative.  First, your car must have been financed outside 910 days of filing for bankruptcy.  Second, you have to be "out of equity" in your car, meaning you owe more on it than it is worth.  Most vehicles depreciate rapidly and far quicker then the balances are paid down.  If you meet these two requirements, you may be able to reduce the balance you owe from the outstanding original financed balance to the "fair market value" of your car.  It may also be possible to reduce the interest rate.

Let's say the balance on your car loan is $15,000 but the fair market value of the car is only $8,000.  The $15,000 can be reduced and modified by the bankruptcy court, so you now only owe $8,000.  That amount would be paid through your Chapter 13 plan.  This could result in a substantial reduction in your car payment.  You get to keep your car, pay what it’s worth and not what you owe. This concept is called a "cram down", in that you're cramming down the principle balance.

Varying and Unsettled Laws

Many of the laws surrounding the “910 Day Rule” are unsettled and evolving.  This has resulted in a difference of legal opinion in different jurisdictions.  Likewise, if you are considering filing for Chapter 13 Bankruptcy and have a vehicle loan, it is critical you speak to a qualified bankruptcy attorney.