What is a Cram Down in a Chapter 13 bankruptcy filing?

A “cram down” in Chapter 13 allows a debtor to reduce certain secured debts. A cram down is only available in Chapter 13. A debtor can use a cram down when the debtor owes more on a loan than what the property is currently worth. A debtor cannot use a cram down to reduce the amount owed on a mortgage, even if the home is no longer worth the amount owed on the mortgage.

Types of Debt Eligible for a Cram Down

A debtor may use a cram down to reduce property secured by collateral, such as personal property that the debtor purchased at least one year before filing for bankruptcy, a car loan (the debtor must have purchased the car at least 30 months prior to filing for bankruptcy) or a mobile home (only if the state considers it personal property). 

How a Cram Down Works 

When cramming down a car loan, for instance, the bankruptcy court will reduce the loan down to the current value of the car. This is the replacement value. If the debtor owes $15,000 on a car loan, but its current value is $10,000, the court will reduce the loan amount to its current value. The court will also reduce the interest rate on the loan to 1 ½ to 2 percent points above the prime rate. The amount in excess of the car’s value, in this case $5,000, becomes unsecured debt. In Chapter 13, any amount of unsecured debt remaining at the end of a Chapter 13 plan is subject to discharge.

A cram down can provide a significant benefit to a debtor. If you may be eligible for a cram down, contact a bankruptcy attorney for more information.