What is a Cramdown in Bankruptcy and How Can It Help?
Bankruptcy can be incredibly stressful, especially once you realize that you may have to give up some of your personal assets in order to pay back creditors. If you are filing for Chapter 13 bankruptcy, you may be able to use something called a cramdown to keep your items and decrease your debt as you make payments.
Still weighing your bankruptcy options or not sure which option is the best fit for you? We’re here to help. Call Padgett & Robertson at 251-342-0264 to schedule a consultation now.
The Basics of a Cramdown
A cramdown basically allows you to pay less on a secured debt by decreasing the balance of the debt to the value of the actual item. This is useful when the value of your item is less than the amount you owe.
Consider, for example, a car you bought from Mullinax Ford of Mobile down on Airport Boulevard. Although you bought the car for $25,000 four years ago, you still owe $17,000. Unfortunately, the car is now worth just $13,000. Even if you sold the vehicle for its fair market value, you would not be able to pay off the loan.
If a cramdown is approved, it would reduce the amount you owe on the car to $13,000. The other $4,000 would be classified as unsecured debt, much like a credit card or personal loan.
Debts That Qualify for a Cramdown
Only secured property loans qualify for a cramdown, and there are specific limitations on each type of debt. Qualifying debts include mortgages, auto loans, and secured loans for items like furniture and jewelry.
How It Benefits You
There are several benefits that come with a cramdown. To start, you reduce your overall debt. You may wonder how since the unsecured portion is simply reallocated to your unsecured debt pile. However, remember that some unsecured debt is forgiven in most Chapter 13 bankruptcies.
Your payment plan will give priority to secured debts and priority debts. Unsecured debts only get paid once they are paid. At the end of your three to five years of repayment, any unsecured debts that have not been paid are forgiven. You own your property without any stipulations and are free of your debt.
Additionally, you may be able to free yourself from restrictive interest rates with a cramdown. In a cramdown, the lender does not set the interest rate. The court does. If the interest rate is lower than what you are currently paying, you could experience substantial relief.
Your overall monthly payment may decrease. If your loan period is less than the three to five years of your payment plan, your payment plan will spread the crammed-down amount over the entirety of the plan. This gives you much more breathing room as you get back on track financially.
Restrictions to Remember
If you want to cram down a vehicle, you must have bought the car and taken out your loan at least 910 days prior to filing for bankruptcy. The goal is to prevent people from getting new property, filing for bankruptcy, and getting their balances dropped.
You can only cram down the mortgage on a vacation home or rental home, not your primary residence. While this is technically an option, few people use it. The full amount of secured debt must be paid off by the end of your three-to-five-year repayment plan, and that monthly payment would be very high on a standard mortgage.
To cram down personal property, you must have bought the property at least one year before filing for bankruptcy. This includes loans taken out for furniture, appliances, jewelry, and other purchases that use in-store financing. Note that this is not the same as using a store credit card to buy something.
Discuss Your Options with Padgett & Robertson
Remember, cramdowns aren’t available in every Chapter 13 bankruptcy. While you may read about them and think that they’re the solution to your debt problem, don’t jump into bankruptcy without knowing your options and how they will play out. Meeting with a bankruptcy attorney allows you to learn more about your options and make the best choice for your future. Set up a consultation with Padgett & Robertson now by calling us at 251-342-0264 or contacting us online.
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