There are specific advantages you can enjoy when you file for a Chapter 13 bankruptcy. One of them is the ability to change a secured creditor’s rights. This means that you, as the debtor, can modify the contract terms with certain creditors via a bankruptcy provision called the cramdown.
Essentially, this provision minimizes the amount owed to the collateral’s fair market value. The collateral’s fair market value will be established by getting an appraisal or using another approved method for evaluating the value of an item.
Understanding Cramdown
An example of a secured debt that you can “cramdown” during bankruptcy is an auto loan. For instance, let’s say you bought a car for $25,000 with monthly installments of $400 at 0% interest, for a period of five years. You then file for Chapter 13 three years later. You have paid a total of $14,400 in car payments, but you still need to pay the remaining balance, which is $10,600. But due to depreciation, the current value of your car is now only at $6,000, so you owe $4,600 more than the value of your car.
How a Cramdown is Used
By using a cramdown, you can lower the amount you owe on your auto loan to your car’s current value, $4,600. Your lender will have no choice but to agree to that amount. You should include this reduced debt in your debt repayment plan to enable you to pay in installments over a term of three to five years. This way, you eliminate the $4,600 debt and gain more time for repaying your lender, as well as reduce your car payments.
So, rather than paying the remaining balance of $10,000 within two years at $400 a month as stated in your original loan contract, you now only have to pay $6,000, which you can repay within three to five years. Once you have completed your repayment plan, you will own your car and your loan debt will have been repaid.
Debts Eligible for Cramdown
It’s important to note that not all types of secured debts are eligible for cramdown, so it’s important that you consult an experienced bankruptcy lawyer in Salt Lake City or any other location to determine which debts you can use the cramdown provision for. For instance, the asset should be considered personal property. Likewise, depending on what type of asset it is, there might be a time limit that should’ve passed from the time you obtained a loan for an eligible asset prior to it being eligible for cramdown.
For example, you can’t cramdown an auto loan for a vehicle you bought within 910 days before your bankruptcy filing. You also can’t cramdown a secured debt for any asset that you bought within a year of your bankruptcy filing.
Done right, a cramdown will enable you to lower a principal balance of the eligible debt. By leveraging the cramdown provision when you file for a Chapter 13 bankruptcy, you might be able to hold on to an investment property, vehicle, or other eligible personal properties.