Sometimes you can find yourself so deep in debt that you owe more on your household goods, car, and other real property than they are worth. If this happens and you don’t want to risk surrendering these assets in a Chapter 7 bankruptcy, a then Chapter 13 may allow you to “cram down” these debts, meaning that you reduce the balance and interest rates to pay less than what you owe.
How are cramdowns done?
Although you cannot cram down the mortgage on your principal residence, other loans (such as cars) and mortgages on investment or commercial properties can be reduced in a Chapter 13 bankruptcy. For example:
If you take out a $25,000 auto loan to buy a car in 2016 and, in 2019, then you still owe $20,000 but the car is now only worth $15,000, this is the amount that remains secured. In other words, if the car dealer seized and sold it, then they would only get $15,000. With a cramdown, you can reduce the $20,000 that you owe to $15,000 and own the vehicle after you pay this new amount as part of your Chapter 13 bankruptcy.
The unsecured portion of the original loan ($5,000) will be grouped with your credit card balances, medical bills, utilities, and other unsecured debt. Even in a Chapter 13 bankruptcy, unsecured creditors receive a portion of what they are owed, so you will probably pay a lot less than $5,000. Once you complete the bankruptcy plan, this debt will be discharged along with your other unsecured debts.
Cramdown restrictions explained
Cramdowns have some limitations, although they vary according to loan type.
If you are trying to cram down an auto loan, then the 910-day rule will apply. It states that you must have taken out the loan to buy the car at least 910 days (or two-and-a-half years) before filing your Chapter 13 petition. Any vehicles bought sooner cannot have their loans crammed down unless they were purchased for business use.
All other personal property loans, such as furniture financed through a store program, must have been bought at least one year before your bankruptcy if you want to cram down the loans.
For mortgages on commercial or investment properties, there are no timing guidelines but most bankruptcy courts want you to be able to pay off any crammed-down balances at the completion of the three-to-five-year repayment plan. Most people who are forced to declare bankruptcy are not in a financial position to pay off a mortgage this soon, so this type of loan cramdown, which is legally possible, is rarely used.
Contact a New York bankruptcy attorney
If you are contemplating bankruptcy as a way to address your financial difficulties, then an attorney can help you determine which chapter is most appropriate for your situation and guide you through the filing process so that you get the fresh start you need. Jayson Lutzky is a Bronx lawyer handling personal bankruptcy and can be reached at 718-514-6619.