Declaring bankruptcy can be the answer for debtors who are struggling financially. It often presents an effective solution for overwhelming financial problems. The bankruptcy code offers different types of bankruptcy. Choosing the right bankruptcy chapter under which to file a bankruptcy petition depends on the individual’s unique circumstances. For those who wish to keep as many of their assets as possible when they undergo personal bankruptcy, Chapter 13 (reorganization) is most likely the right filing chapter for them.
There are many possible reasons why a debtor would choose to declare bankruptcy under the reorganization chapter. One of the benefits of Chapter 13 bankruptcies is the “cramdown.” If debtors file for bankruptcy under Chapter 13, they get the chance to “cram down” a secured debt. A cramdown is the reduction of a debt’s owed balance to the value of the property that is attached to it. It usually involves car loans, but it may also be applied to other secured debts such as mortgages on investment homes and other kinds of assets, including furniture and even personal items. Take note, however, that, unless it qualifies under certain conditions, you cannot cram down your primary residence mortgage.
What qualifies a secured debt for a cramdown? It must be a debt in which a security interest in the asset is paid to the lender, who also has the right to repossess if the debtor is unable to make debt payments.
Why Cram Down a Loan?
A cramdown means lower monthly payments not only for the longer period of time to pay off that loan, possibly lasting the three to five-year duration of the bankruptcy case but also for the possible intervention of the bankruptcy court to reduce the loan’s interest rate. Once the loan is paid off, the asset belongs to the filer free and clear.
This is what essentially happens in a cramdown: if the balance of a loan is more than the actual worth of the asset, it is divided into two types of debt. The amount pertaining to the value of the asset becomes the secured part of the debt while the remaining amount becomes non-priority unsecured debt. Non-priority unsecured debts may end up unpaid or only partially paid in Chapter 13 bankruptcy cases. Once the bankruptcy process has been completed with the debtor fulfilling the terms of the repayment plan, including the payment of the secured part of the aforementioned loan, its unsecured portion is no longer an obligation.
What Are Cramdown Requirements and Restrictions?
Cramdowns have limitations. Federal bankruptcy law doesn’t allow debtors to cram down loans involving a recent purchase of a car, investment property, or personal property. When it comes to a car loan, it should have been purchased at least 910 days prior to the Chapter 13 bankruptcy filing to prevent consumers from pulling one over on lenders by buying a car before filing for bankruptcy and then using the cramdown advantage to lower payments.
Similar to the 910-day requirement, there is a one-year rule for cramming down loans on all types of personal property, including household items. Federal bankruptcy laws require for personal property attached to a loan to have been purchased at least a year before filing bankruptcy under Chapter 13 to qualify for a cramdown.
Are There Potential Problems in the Cramdown of Investment Property Mortgages?
There are special issues that may arise in cramming down an investment property mortgage. The terms of a cramdown usually involve paying off the loan during Chapter 13 bankruptcy proceedings, which may last from three to five years. This is usually not enough time for filers to pay off even the reduced version of their mortgage. Failing to realize this may result in a balloon payment toward the end of the bankruptcy payment plan. This is generally not something somebody in financial distress can manage. This is why it’s important to think carefully about cramming down any investment property mortgage owed.
Interested in Cramming down a Loan? Contact an Arizona Bankruptcy Attorney Today!
If despite going bankrupt, you still want to repay most of what you owe, consult a bankruptcy lawyer on how you can pay back your creditors after you file bankruptcy. A loan cramdown may very well be part of your discussion.
If you’re considering filing, bankruptcy lawyers can advise you on how to optimize this provision of the law. To make sure that you make informed decisions every step of the way, call us at Phoenix Fresh Start to speak with one of our experienced Arizona bankruptcy attorneys.