How a Cram Down Works in a Chapter 13 Bankruptcy Case

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You can use a cramdown in Chapter 13 bankruptcy to legally reduce the balance you owe on a secured loan to the actual value of the collateral. A cramdown is possible if the amount you still owe on the loan secured by the property is more than the value of the property.

Here’s how a cramdown works in Chapter 13.

Chapter 13: Secured Debts and Unsecured Debts

In Chapter 13 bankruptcy, you must continue to make payments on secured debts if you wish to keep the collateral. The collateral is the property that secures the loan – if you default on the loan, the lender can take the collateral. A common example is a car loan which is secured by the car. If you default on the car note, the lender can repossess the car. (To learn more about secured and unsecured debts, see Secured vs. Unsecured Debt.)

Unsecured debts are treated differently in Chapter 13 bankruptcy. You pay all or a portion of your unsecured debts through your Chapter 13 repayment plan. Most debtors ended up paying less than the full amount of the unsecured debt. At the end of the repayment plan, the remaining balance of your unsecured debt is discharged (wiped out), unless there is some reason why a particular debt is nondischargeable.

How a Cramdown Works

Sometimes a loan is no longer fully secured by the collateral. This often happens with property that depreciates in value (like a car) or which has seen a decline in value (like much real estate in today's market).

For example, if you owe $20,000 on a car you bought several years before you filed for bankruptcy, but the car is only worth $15,000, the loan is no longer fully secured by the car. (Only $15,000 of the loan is secured.)

In this situation, the bankruptcy court allows you to cram down the secured loan to the replacement value of the collateral. Instead of having to pay off the full loan amount, you instead pay off an amount equal to the replacement value of the property. You pay this amount over the life of your repayment plan. The remainder of the loan becomes unsecured debt, which you also pay through your repayment plan – but because of the way unsecured debt is treated in Chapter 13 bankruptcy, this usually means you pay pennies on the dollar.

In the example above, you could cram down the car loan to $15,000 and then pay off the $15,000 through your repayment plan. You would lump the remaining $5,000 into your unsecured debt, and also pay it (or more likely, a portion of it) through your plan.

One catch – you must have purchased the property at least 2 ½ years before filing for bankruptcy.

No Cramdown on Your Residence

You cannot cram down mortgages or liens on your principal residence. If you want to keep your home, you'll need to keep paying the mortgage. There are several small exceptions to this rule.

You may be able to cram down loans on other real estate, like commercial or investment properties. Keep in mind, however, that you must pay off the entire amount of the crammed-down loan through your repayment plan. This makes cramdowns unrealistic for most real estate loans.

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