For individuals struggling with overwhelming debt, Chapter 13 bankruptcy offers a path to financial rehabilitation, giving them protection from creditors while they pay off a reduced portion of their unsecured debt over time. Secured debts still need to be repaid, but there is a powerful tool known as a “cram down” that can offer relief from these debts.
In simple terms, a cram down allows a debtor to reduce the principal balance of a secured debt to the current market value of the collateral property. This essentially means that the debtor only repays the amount the collateral is actually worth, rather than the original loan amount.
A cram down is particularly beneficial in situations where the value of the collateral, such as a car, has depreciated significantly since the loan was taken out. For example, if a debtor owns a car that is worth $10,000 but has a $15,000 car loan, the balance can be reduced to $10,000. The remainder becomes unsecured debt that falls under the Chapter 13 repayment plan, which means it might be discharged.
Cram downs offer several advantages for debtors, namely:
- Reduced payments — More manageable debt payments can free up capital needed for other essential expenses, increasing the likelihood of completing the Chapter 7 plan successfully.
- Retention of property — Lowered debt payments may be the difference between keeping the collateral and having it repossessed, which could hinder the debtor’s ability to earn income.
- Potential interest rate reduction — The court may also allow the debtor to reduce the interest rate on the remaining debt, significantly lowering the overall debt obligation.
While cram downs offer numerous benefits, it’s important to understand that they’re not applicable to all secured debts. For one thing, cram downs are not allowed for a first mortgage on a debtor’s primary residence. However, they can be used for second mortgages or home equity lines of credit.
For certain secured debts, the cram-down option may be limited if the debt was incurred within a specific timeframe before filing for bankruptcy. For example, a car loan will not qualify for cramdown unless the debtor has owned the car for at least 910 days (2.5 years). This prevents someone from filing for Chapter 13 bankruptcy to cramdown a car loan immediately after purchasing the car. For other personal property, the required ownership period is one year.
Cram downs can be complicated and should not be attempted without professional guidance. A skilled Chapter 13 attorney can assess your individual situation, determine your eligibility and guide you through the process effectively. They can also help you deal with possible creditor objections and take proper measures so that your plan has the best chance of approval by the court.
Jeff Field & Associates has more than 30 years’ experience representing debtors in Chapter 13 proceedings throughout the Atlanta metropolitan area, with offices in Athens, Douglasville, Gainesville, Lawrenceville, Marietta, and Scottdale. To schedule an appointment, call 404-381-1278 or contact us online.