Filing for Chapter 13 bankruptcy can be a frightening and overwhelming process, especially when all you want to do is protect your assets from aggressive creditors and figure out a way to keep yourself afloat.
One of the advantages of filing under Chapter 13 is being able to “cram down” a debt-secured property. What does this mean, and how can it impact you? At Telpner Peterson Law Firm, LLP, we want to tell you about the concept of cramdowns and what a cramdown could mean to your bankruptcy case.
What Is a “Cramdown” and How Does It Work?
Cramdowns are generally associated with car loans but can also be used for some other secured loans, such as those for furniture or some types of real property. To apply a cramdown in a Chapter 13 repayment plan, the value of the asset, not the amount of the loan, is paid over the length of the plan. The court may change the interest rate if it chooses to do so. When a cramdown is used, the monthly payment may be reduced. The end result is that at the end of the Chapter 13 repayment plan, the debtor owns the asset free and clear. No additional payments will be required.
Consider this example: you owe $15,000 for your car, but due to depreciation, the vehicle is now valued at $10,000. Using a cramdown, you can reduce your monthly payments to a total of $10,000, which is the value of the asset that secures the loan. The remaining $5,000 balance would then be considered non-priority unsecured debt. Non-priority unsecured debt is usually not paid off in Chapter 13 bankruptcy filings.
Cramdown Restrictions
Federal law restricts the use of cramdowns on certain types of property. Federal law also limits the use of cramdowns on any recently purchased property. You can only benefit from a cramdown if you take out a car loan at least 910 days prior to filing for bankruptcy. Cramdowns cannot be used on recently purchased vehicles, even though the vehicle has already depreciated. Similarly, you cannot benefit from a cramdown on personal property unless that property was purchased at least one year before filing for Chapter 13.
These regulations are in place to help prevent people from abusing the cramdown system and purchasing goods with the knowledge that they will soon file for bankruptcy.
Does Cramdown Work on Property Mortgages?
The idea behind cramdowns is that the loan is paid off within the length of the Chapter 13 bankruptcy repayment plan. Generally, repayment plans are made in three- or five-year intervals. It is not practical to cram down a mortgage, and most people do not have the income to pay off the loan in such a short amount of time. Attempting to cram down a mortgage can often cause more problems than it solves.
Will Cramdown Work for You? Talk to an Experienced Bankruptcy Attorney
While beneficial, the concept of cramdowns can be difficult to grasp. Can you use cramdowns to your advantage during a Chapter 13 bankruptcy filing? Talk to a skilled bankruptcy attorney with Telpner Peterson Law Firm, LLP, to find out.
At Telpner Peterson Law Firm, LLP, we will sit down with you and carefully review your financial situation. Our legal team can assess your case and advise you about whether you would benefit from cramdowns. For more information and to set up a consultation with one of our knowledgeable bankruptcy attorneys, contact us online or call our office at 712-309-3738 today.