Save Your Properties With Legal Help

A cram down in Chapter 13 bankruptcy allows you to modify your repayment plan for certain debts. That can be helpful if you can’t afford to repay the full amount you owe. 

With a cram down, the court lowers the amount owed on secured debts, like car loans, to the car value itself. That can make your monthly payments more manageable. However, it’s crucial to know that cram-downs don’t apply to all debts, like home mortgages. 

Quick Summary:

  • Chapter 13 bankruptcy lets individuals with income create a manageable debt repayment plan over three to five years under court supervision. You propose a plan to repay your debts through monthly payments, allowing you to catch up on missed payments and potentially save your property from foreclosure or repossession.
  • A cram down in Chapter 13 bankruptcy lets you adjust your repayment plan for secured debts like car loans. If you owe more than your car is worth, you can reduce the amount owed to the car’s value. That lowers your monthly payments and helps you keep the car. However, cram-downs don’t apply to all debts, and there are restrictions on how you can use them.
  • You can use a cram down for car loans, investment property mortgages, and other secured loans on personal property (excluding your primary residence).
  • Cramdowns may also allow for lower interest rates and extended repayment terms, making your monthly payments more manageable.
  • There are time limits on cramming down car loans (910 days) and other secured debts (1 year). Investment property mortgages may be difficult to cram down due to repayment requirements within the Chapter 13 plan.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, also known as a wage earner’s plan, is a bankruptcy type that allows individuals with regular income to create a court-supervised repayment plan for their debts. It’s a way to restructure your finances and catch up on payments throughout three to five years.

Here’s a breakdown of how Chapter 13 bankruptcy works:

  • Repayment Plan: You’ll develop a plan to repay all or a portion of your debts through monthly payments to a court-appointed trustee, who then distributes the funds to your creditors.
  • Debt Types: There are two main debt categories: secured and unsecured. Secured debts, like mortgages and car loans, are tied to collateral, so the plan must allow you to repay them in full to keep the property. Unsecured debts, like credit cards, may only be partially repaid.
  • Benefits: Filing for Chapter 13 can stop foreclosure or repossession of your property while you get back on track. It also offers protection from creditor collection efforts during the repayment process.

What are the Advantages of Cram Down in Chapter 13?

Cram downs in Chapter 13 bankruptcy offers a few key advantages:

  • Lower Monthly Payments: If you owe more on your loan than your car is worth, a cram down reduces the amount you repay to the actual car value. That translates to smaller monthly payments, making it easier to afford to keep your car.
  • Potential Interest Rate Reduction: The bankruptcy court might also lower the interest rate on the crammed-down loan. That further reduces your monthly payment burden.
  • Extended Repayment Period: Chapter 13 plans typically last three to five years. Cram downs allow you to stretch out your car loan payments over this entire period, making them even more manageable.
  • Keep Your Property: By lowering your monthly payments and potentially extending the repayment term, a cram down can help you afford to keep your property (like your car).

How Does A Cram Down Work in Properties?

You can use a cram down for the following, in which we explain how they work below: 

Cram Down in Car Loans

Cars are like most things you buy; they tend to lose value over time. That is called depreciation, like how the value of a used video game is less than a brand-new one. Because of depreciation, it’s pretty common to owe more on your car loan than your car is worth. 

Here are some things that can make this more likely:

  • High-interest loan: If the interest rate on your loan is high, you end up paying more for the car overall. Imagine you borrow $100 from a friend with no interest, but another friend charges you $10 extra to borrow the same $100. The interest is like that extra fee, making the total cost higher.
  • Overpaying: If you pay more than the car’s actual value, say $10,000 for a car only worth $8,000, you’ll owe more than it’s worth.
  • Rolling over a loan: That means you add any leftover money you still owe from an old car loan to your new loan.
  • Fast depreciation: Some cars lose value faster than others. As some sneakers go out of style quickly, some cars lose value quickly too. Researching a car’s history can help you avoid this.

Cram Down in Investment Property Mortgages

A cram down in the context of a property refers to a process within Chapter 13 bankruptcy that allows you to reduce the loan amount on a secured debt, like an underwater mortgage, to the property’s current market value. 

You can potentially cram down the mortgage by filing for Chapter 13 bankruptcy. That means the court could approve a plan that reduces the loan principal to the property’s fair market value. You would then repay this adjusted amount through your Chapter 13 repayment plan, typically within three to five years.

What Happens to Remaining Car Loan Balance After a Cram Down?

In a Chapter 13 plan, these debts have leftover balances that might not be enough to go around for everyone. Because these debts aren’t critical (also called “nonpriority unsecured”), the car lender might get nothing back, or just a tiny amount, on the remaining loan. 

But the good news is, after you finish your Chapter 13 plan, you’ll officially own your car without any debt on it.

What are the Limitations of a Cram Down?

Cram downs in Chapter 13 aren’t instant solutions. There are limits: not all debts qualify, and there are time restrictions to prevent people from buying something new and immediately cramming down the loan. 

There are some catches to cramming down in Chapter 13:

  • 910-Day Rule: You cannot buy a new car and immediately cram down the loan. You must have owned it for at least 2 ½ years before filing for bankruptcy. That stops people from buying a fancy new car and then lowering the loan amount immediately.
  • One-Year Rule: Like the car rule, other things you own (furniture, appliances) must be owned for at least a year before you can cram down the loan in bankruptcy.
  • Investment Property Mortgages: Cram downs usually need to repay the loan within three to five years (the Chapter 13 plan timeframe). That can be tough for investment property mortgages, since they’re typically much bigger loans and take longer to pay off.

Get to the Bottom of a Cram Down in Chapter 13 Now! 

If you’re dealing with a cram down, contact Phoenix Fresh Start. Our law firm’s bankruptcy attorneys can help you understand the ins and outs of cram downs and ensure that you lower your payments to an amount that’s reachable for you.

Our attorney can navigate the legal complexities of a cram down, ensuring your plan meets court requirements and maximizes your chances of success. They can also represent you in court if the lender objects and explore other options like loan modification to find the best solution for your situation.

Our attorney can also assist with Chapter 7 bankruptcy. Our attorney guides and helps determine which bankruptcy you best qualify for.

Don’t wait too long. Call our attorney at Phoenix Fresh Start today!