Chapter 13 Bankruptcy: Cramdown 101
If you are filing for Chapter 13 bankruptcy and want to know what to expect, it’s helpful to learn about the concept of a cramdown. Learn more below…
What is a Cramdown in Chapter 13 Bankruptcy?
The objective of a cramdown is to reduce the principal balance of a secured debt to the value of the collateral by which it is secured.
A secured debt is a debt in which you put an asset, such as your car, up for collateral. What this means is that if you default on the debt, your creditor can sell your car and use the money from the sale to pay him- or herself back. Mortgages are secured debt in which the collateral is your home.
The reason a cramdown is desirable is because nonpayment and compounded interests can leave you owing far more than you originally borrowed, and far more than the item you put up for collateral is worth.
During a Chapter 13 bankruptcy you can get a cramdown for certain types of secured loans— most often auto loans and mortgages on properties that are NOT your primary residence.
How a Chapter 13 Bankruptcy Cramdown Works
Now that you understand what a cramdown is, you might need more clarity about how it actually works. When you cramdown a loan, you make its value the same as the value of your collateral. Any amount above that doesn’t just disappear. It becomes lumped in with your unsecured debts.
And why is this good? Because during a Chapter 13 bankruptcy, you usually only end up paying a fraction of your unsecured debts before the remainder is wiped clear. You can also reduce your interest rate and space your payments out over a longer period of time.
There are certain regulations dictating what debts you can and cannot cramdown. For example, you cannot cramdown an auto loan unless the car was purchased at least 2 and a half years (or 910 days) before the date you filed for bankruptcy. An experienced bankruptcy attorney can help you navigate the rules and ensure that you complete the process properly and wisely.
Filing Chapter 13 Bankruptcy? Contact Maxwell Dunn PLC
If you are considering filing for bankruptcy, the Maxwell Dunn PLC team is here to help. If you have questions about cramdown or other bankruptcy matters, we would love to hear from you. If you’re ready to discuss your situation with an experienced bankruptcy attorney, contact us today!