Reduce Bankruptcy Debt With a Cramdown?

A “cramdown” is a special procedure to that can help reduce bankruptcy debt when declaring a Chapter 13 bankruptcy.  The debt must be secured, meaning that non-payment of the contract will allow the lender to repossess (take back) the item (collateral) from the borrower.  When the value of the secured item is worth less than the borrower owes, then the debtor can cram down the loan to the reduce replacement value and decrease the debt.

An Example of a Cramdown in Bankruptcy

A “cramdown” often concerns property such as an automobile, a boat or furniture.  For example, an automobile can depreciate quickly in replacement value due to advances in age, wear, and tear.  The replacement value is the retail purchase price for a used automobile.  As illustration, a debtor owes $10,000 on a car loan, but the car only has a replacement value of $3,000.  The amount owed is greater than the value of the car (collateral).  In a Chapter 13 proceeding, the loan can “cramdown” to a secure loan of $3,000 with a new interest rate.  The debtor can still keep the car and pay the reduced loan over three to five years.  The unpaid $7,000 is now treated as an unsecured loan which can get discharged upon the completion of the Chapter 13 repayment plan.  As a result, this cramdown has significantly helped reduce bankruptcy debt for the debtor.

Some Special Cramdown Rules

  • The cramdown of an automobile contract is only allowed when the purchase price by loan was greater than 30 months prior to the Chapter 13 bankruptcy filing.
  • A cramdown cannot be done in a Chapter 7 bankruptcy because there is no payback plan to the creditor.
  • The cramdown of other types of property (e.g. furniture) contract is only allowed when the purchase by loan was more than a year prior to the Chapter 13 bankruptcy filing.
  • A cramdown of a first mortgage cannot be done on a debtor’s principal residence in which the collateral is the home.
  • A cramdown of a mortgage on a second home, a vacation home or an investment property can be done in a Chapter 13 bankruptcy because an investment property, such as rental home or vacation home, is not considered a debtor’s principal residence.

Cramdowns will reduce bankruptcy debt.  Additional details about cramdowns can be found in the U.S. Bankruptcy code 11 U.S.C. § 506(a) and (d).

Considering a Bankruptcy?  Contact a NJ Bankruptcy Lawyer Today!

At Villani & DeLuca, a knowledgeable bankruptcy attorney can discuss your options.  When you contact our firm a lawyer who specializes in bankruptcy will discuss how you can reduce bankruptcy debt and other financial issues with you by phone or arrange an in-person consultation free of charge.  Call Villani & DeLuca at (732) 965-3350 today to speak with a New Jersey bankruptcy lawyer.