Filing for Chapter 13 bankruptcy often allows consumers to give themselves a little breathing room with their debt. In most cases, debt is reorganized and a reduced payment plan is created for a three to five year term. At the end of that period, much of the debt is “forgiven” and they are able to start with a clean slate. However, there is also a “cram down” feature that allows the consumer to lower the principle on some secured debt. Our professional bankruptcy attorneys and debt consultants are happy to provide you with a 100% free consultation and let you know how they can help!
What Debt is Eligible for Cram Down?
In most cases, this feature is only available for certain secured debts, such as a car loan. In addition to car loans, you can also lower specific mortgages, such as investment properties and loans that were taken out for household furnishings and goods. The secured debt that is NOT eligible is the mortgage on your primary residence.
Advantages of a Cram Down
Much like a debt consolidation, a cram down may allow you to rework some of the terms to create a more budget-friendly payment. By lowering the principal and interest rates, you will be able to keep your assets, avoid Chapter 7 bankruptcy, and have some money left over at the end of the month to start saving again.
How to Cram Down Loans
One of the main reasons the court will allow a cram down is because the loan is “upside down,” meaning you owe more than the value of the asset. Cars are always easy to use as an example, so let’s assume you recently purchased a car and still have $20,000 left on the loan. As we all know, the value of a car depreciates very quickly. In this case, the value of the car is estimated at $12,500. Your car loan would be “crammed down” to $12,500 and the balance of the loan would be folded into your unsecured debt, of which you would only be paying a small percentage of during the Chapter 13 bankruptcy. At the end of the three to five year payment plan, you own the car outright and all unsecured debt that is not yet paid is dismissed.
Cram Down Restrictions
Just as with a Chapter 7 bankruptcy and luxury purchases, there are some restrictions with a Chapter 13 bankruptcy. These restrictions are listed below:
• Investment Property – when a loan is crammed down, it needs to be paid off at the end of the three to five year repayment period. This could present a problem to most people if they try to cram down the mortgage of an expensive property.
• One-Year Rule – all loans for personal goods and furnishings must be at least one year old to be eligible for a cram down.
• 910-Day Rule – same as the one-year rule, but this applies to any car loan you are trying to cram down. The car must have been purchases at least 910 days prior to filing for Chapter 13 bankruptcy.
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