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.