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From Executive Director
Cram down is a term used in bankruptcy for a way that you can legally reduce, often significantly, the amount that you pay a secured creditor such as a car lender and still keep the property subject to the secured debt such as your car. It is often spelled cramdown and referred to as cramdown bankruptcy and bankruptcy cramdown. To certain Chapter 13 bankruptcy filers, cram down is very important and a real benefit to them.
What Is Cram Down
Under bankruptcy law, you are able to pay certain secured creditors less than what you actually owe them and there is nothing that the creditors can do about it. Since creditors cannot stop your paying them less, it is referred to as a cramdown.
People normally use bankruptcy cramdown with loans secured by personal property such as cars, furniture, appliances, etc. While first mortgage home loans are not subject to a cram down, as discussed below, second or third mortgage home loans may be.
Typically, when you purchase a car or some other personal property and you obtain a loan for the purchase, you put up the property as collateral securing your payment of the loan. Also, in most cases, the property depreciates in value immediately. From the start, you owe more than the value of the property. If you do not make the required payments or do not pay what you owe, the creditor will repossess the property and sell it in a commercially reasonable manner as required by law. In just about every case, because the whole debt is secured by the property and because the property has depreciated in value, the sales price when the creditor sell the property is less than the amount you owe and the creditor can seek a deficiency judgment against you.
Cramdown bankruptcy changes what typically happens. Under bankruptcy law, you are able to keep the secured property by paying the creditor what is the value of the property instead of the amount of your debt. Basically, your debt is divided into two parts. The first part is deemed to be secured debt and is the value of the property, which is probably significantly less than the amount of your debt. The second part is deemed to be unsecured debt and is the difference between the
value of the property and the amount of your debt. You pay the secured part (property’s value) in full, and pay the unsecured part the same as an unsecured creditor such as a credit card creditor.
Bankruptcy law goes further and says that you do not need to pay the same interest rate on the secured part as the loan requires. Instead, you can pay the prime interest rate plus 1-3%, depending on the circumstances of your case. Further, you can stretch the payments out to the length of your Chapter 13 plan.
Cram Down Example
Perhaps the best way to understand cramdown bankruptcy is look at an example.
Let’s assume that you purchased a car 3 years ago. Your car loan is at 12% interest and is for 6 years. Your current loan balance is $15,000.00, but according to the Kelly Blue Book, your car has a current value of only $9,000.00. You file an action asking the bankruptcy Court to determine the value of your car and reduce the interest rate. Your car lender doesn’t object (creditors can object to the value and some do and some don’t) and the Court approves your action.
The result is that you will have to pay your car lender $9,000.00 plus interest at, say, 5%, and you can stretch out your payments for as long as your Chapter 13 plan provides. The balance of $6,000.00 ($15,000.00 less $9,000.00) is treated as an unsecured claim. Let’s further assume that in your Chapter 13 repayment plan, you are going to pay your unsecured creditors 20% of what they are owed. In this example you will pay your car lender $1,200.00 for the unsecured portion and you will pay it over the length of time that your plan runs.
As you can see, with cram down, you can reduce the amount that you must pay in order to keep the property (in this example, your car), reduce the interest rate, and lengthen the payoff period. All three factors work together to reduce the monthly payments and the total payment.
Limits On Cram Down
There are several limits on cram down.
First, for bankruptcy cramdown to apply to a car, you must have purchased the car using a loan more than 910 days (about 2.5 years) before filing bankruptcy.
Second, for cramdown to apply to other personal property such as furniture, you must have purchased the property more than 1 year before filing bankruptcy.
Third, cramdown in bankruptcy is available for non-purchase money security interest in personal property. These are cases where you owned the property before you obtained the loan where you pledged the property as collateral. For example, you borrowed $5,000.00 from a loan company and put up your furniture (which you already owned) as collateral. If the furniture has a real value of $500.00 because it is used and worn, you can cram down, and pay the loan company $500.00 plus the lower interest instead of the $5,000.00 at a high interest.
You need to be aware that some bankruptcy Courts apply the 1 year rule where, to use cram down, you must have obtain the loan more than 1 year before filing bankruptcy. Other bankruptcy Courts do not apply the 1 year rule and allow you to cram down on any loan that is secured by a non-purchase money security interest in personal property.
Fourth, you cram down by filing an adversary action in the bankruptcy Court. This is basically a federal lawsuit against your creditor in the bankruptcy Court. Your creditor can object and, if your creditor does object, there will be a hearing after which, the Judge will rule. As with all lawsuits, you and your creditor can negotiate a settlement and present it to the Court for the Judge’s approval.
Cram Down On Home Loans
Even though you may owe more on the first mortgage on your home than your home is worth, you cannot cram down on the first mortgage.
However, you may be able to strip off the second mortgage, home equity mortgage, and third mortgage, if you owe more on the first mortgage than your home is worth. Bankruptcy law protects mortgage lenders if their security interest has any value whatsoever. If you owe $175,000.00 on a first mortgage, but the value of your home is only $150,000.00, then a second, home equity, and/or third mortgage lender does not have anything of value securing it’s mortgage. In essence, the second mortgage, home equity, and/or third mortgage lenders are unsecured creditors and you can strip off their mortgage and treat them the same as an unsecured creditor. If there is as much as $1.00 in value securing the second mortgage, home equity, and/ or third mortgage, then you cannot strip off the mortgage.
While cram down is limited to Chapter 13 bankruptcies for most secured debts, some bankruptcy Courts are now allowing the cram down or strip off of second mortgages in Chapter 7 bankruptcies.
Because cram down is (1) subject to facts that are unique to your case, (2) varies somewhat from one bankruptcy Court to another, and (3) is a lawsuit type of action, you should consult with a licensed bankruptcy attorney and have him/her handle it for you.
This is general information only. If you have any questions whatsoever, talk with a lawyer licensed in your state who has experience with Chapter 7 bankruptcy, Chapter 13 bankruptcy, or bankruptcy in general.
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