Cramdowns in Chapter 13 Bankruptcy: Here is what you need to know
If you are filing for Chapter 13 bankruptcy, a ‘cramdown’ allows you to reduce the amount of principal balance of your debt to the exact value of the asset it is secured by. Taking advantage of Chapter 13 bankruptcy cramdown can help you save your real estate investment, car, or other types of properties. An experienced Orlando bankruptcy lawyer can guide on when you can successfully use a cramdown and how the process can be helpful.
Which debts can you cram down?
The law allows you to cram down some secured debts. Note that debt can be considered secure if your lender has a security interest in your assets or property and can legally repossess it in case you are unable to make timely loan payments. Car loan and mortgage are examples of secured debt.
According to financial, legal advisors, Chapter 13 bankruptcy lets you cram down your investment property mortgages, car loan, or other personal property (other than real estate) loans including furnishings and household goods. Note that you can’t cram down a mortgage on your primary place of residence.
May people use Chapter 13 bankruptcy to cram their vehicle loans successfully. Here is an illustration to show how the entire process works.
Assume that you own a car worth $7,000, and your loan balance is about $13,000. Chapter 13 bankruptcy allows you to cram down that loan balance to the value of your car – $6,000. The remaining loan balance ($6,000) will be lumped I with your unsecured debts such as credit card debt. The chances are that you will end up paying only a fraction of the unsecured debt and the remaining amount will be discharged at the completion of your plan. The good news is that you will still own your car at the end of your bankruptcy case.
Other benefits of a cramdown
Successfully cramming down your loans lets you reduce the interest rate and the stretch your installments out over a long term. This lowers your monthly payments. Besides, the interest rate paid to all secured creditors is set by the bankruptcy court and is often lower than the initial interest rate.
Note that there are restrictions regarding when you can use a cramdown. After all, some people may want to use this concept to protect their recent purchases. These restrictions include;
The 910-day rule
If you intend to cram down your vehicle loan, you must have bought it at least 910 days before filing for bankruptcy. This prevents you from purchasing a new car then cramming it down soon after driving off the showroom.
This rule applies to all other types of personal property. If you intend to cram down loans on your personal property, you should have bought the property or goods at least one year before filing for bankruptcy.
Investment property mortgages
Many courts require that all loans that have been successfully crammed down be repaid in full within 3 to 5 years of your Chapter 13 plan. This creates a big problem for people who plan to cram down their property mortgages because they may not have the necessary resources to pay off a mortgage within a short period.