A “cram down” in bankruptcy refers to a legal process used primarily in Chapter 13 bankruptcy cases, allowing debtors to reduce the principal balance of a secured debt to the asset’s current market value. If you owe more on a loan than what the property (like a car, equipment, or sometimes real estate) is worth, you can “cram down” the loan amount to match the property’s value. The process effectively splits the debt into two parts: a secured debt equal to the property’s current market value and an unsecured debt for the remaining balance. It is essential to understand your leftover income after expenses on your Chapter 13 bankruptcy petition if you are trying to avoid paying for the unsecured debt.
An example of an auto cram down
You have a car loan with a balance of $15,000, but the current market value is only $10,000. You could reduce the loan balance to $10,000 by cramming down to the car’s market value. The remaining $5,000 becomes part of your unsecured debt, which the debtor will pay off at a significantly reduced rate through your Chapter 13 repayment plan.
An example of a home cram down
You own an investment property (not your primary residence) that you purchased for $800,000. Over time, the property’s market value has decreased, and it is now worth $600,000. However, you still owe $700,000 on the mortgage. In a Chapter 13 bankruptcy, you might be able to cram down the mortgage on this investment property.
Here’s how it works:
- The mortgage is split into a secured claim and an unsecured claim.
- The secured claim is adjusted to match the property’s current market value of $600,000. The $600,000 of what you owe is considered secured because the property’s actual value backs it.
- The remaining $100,000 becomes part of your unsecured debt. Unsecured debts in Chapter 13 bankruptcy are often paid at a fraction of the owed amount, depending on your disposable income and the specifics of your repayment plan.
So, by cramming down the mortgage on your investment property, you reduce the principal balance you’re required to pay back to the creditor for the property’s value. The remainder is treated as unsecured debt, which may allow you to pay much less than you originally owed.
It’s important to note that cram downs are not allowed for mortgages on your primary residence, but debtors can use them for other types of secured debts under certain conditions. Also, there are specific eligibility requirements, such as the 910-day rule for car loans, which requires that the debtor got the car loan more than 910 days before filing for bankruptcy.
Since cram downs can significantly affect both your repayment plans and the rights of secured creditors, they can be complex and contentious. If you’re considering a cram down, please contact me and I can offer a free consultation on your ability to realistically get a cram down.