Cramdown in Chapter 13 Bankruptcy

In personal bankruptcy cases, a cramdown occurs when the filer pays off a secured debt through a Chapter 13 bankruptcy repayment plan by paying only how much the property securing the debt is actually worth, not how much is still owing on the loan. The most common secured debt subject to cramdowns in Chapter 13 bankruptcy are car loans. Upon successful completion of the repayment plan, the filer gets title to the vehicle free and clear of any security interest (called a “lien”) even though a portion of the loan has been discharged as an unsecured debt.

This is how a cramdown works; you get to keep your car at the conclusion of the Chapter 13 repayment plan even though there is a remaining balance on your loan. And you won’t have to make any additional payments. 

Chapter 13 Bankruptcy Basics

When filing personal bankruptcy, individual debtors typically choose either Chapter 7 or Chapter 13. As Chapter 7 bankruptcy involves a full discharge of debts held by unsecured creditors, those who qualify generally choose this path to debt relief. However, if your income is too high, and/or you have significant secured debt, Chapter 13 is typically a better solution. 

In Chapter 13 bankruptcy, you will enter into a three-to-five year repayment plan, which will include all or most of your secured and priority debts, and any remaining unsecured debt, such as credit card debt, medical bills, and collections accounts. Unsecured debt that isn’t fully paid off by the time the repayment period ends will be discharged, and no further loan payments will be necessary. 

How a Cramdown Works

Creditors who are paid back through a Chapter 13 repayment plan are paid pursuant to the terms set by the plan. As such, the debtor can propose a certain amount to pay each creditor, as long as the proposed amount and repayment structure meets Bankruptcy Code requirements. If, for example, you owe $18,000 on a vehicle that is only worth $12,000, you may propose a cramdown value of $12,000 to the bank. If the bank accepts your proposal, you’ve successfully crammed down your car loan and will repay that amount over the three-to-five year period of your plan. 

There are some requirements when proposing an amount for a cramdown. The first is that you must propose at least the vehicle’s fair market value. This is the amount that a dealership could reasonably expect to sell the vehicle for in its current condition, not the liquidation value used to assign a general value to assets in a Chapter 13 bankruptcy. Secondly, you must pay the minimum interest rate, which is the current prime rate plus risk adjustment. 

Once the creditor accepts the proposed cramdown amount and your plan is confirmed, terms are binding. Any balance remaining at the completion of your repayment period will be discharged. At this point, the bank will provide the filer with a free and clear title to the vehicle, via a cramdown. However, it is always a good idea to set a reminder to follow up with your lender once your Chapter 13 has been discharged. Banks may not automatically provide you with a clear title. 

Timing Rules

Not all secured loans with an outstanding balance greater than the value of personal property are eligible for cramdown. There are certain timing rules used to determine eligibility. These are as follows: 

The purchase cannot have been too recent. Any debt incurred for the purpose of purchasing a vehicle is subject to the 910-day rule which states that the car loan has to be at least 910 days old to qualify. Loans for property other than vehicles must have been incurred at least one year prior to filing. This is, not surprisingly, known as the one-year rule. 

There is an exception to the 910-day rule on vehicles, however. If you rolled negative equity from a trade-in vehicle into the new loan, the negative equity portion can be crammed down as it’s not part of the purchase price. Any remaining balance will need to be paid in full. 

What If the Secured Creditor Objects

Simply being eligible for a cramdown doesn’t mean your lender will approve the request, however. In some cases, a creditor will object to the proposal for a cramdown. Generally speaking, there are three reasons why this may occur. These are: 

• The creditor believes that the value of the property is greater than the proposed amount.

• The creditor believes that the proposed interest rate is too low. 

• The debt incurred to purchase the vehicle is less than 910 days old. 

When the issue pertains to one or both of the first two reasons above, filers and creditors are often able to negotiate a resolution that makes all parties happy. When this isn’t possible, however, the court will make a final determination as to the vehicle’s fair market value and proper interest rate. Since it would typically cost the creditor more in legal fees than the benefit they might get from pursuing the issue further, the creditor usually accepts the court’s determination and signs off on the order. 

Cramdown For Real Property

We’ve talked about loans for vehicles, but what about real estate? Unfortunately, first mortgages on your primary residence are not eligible for a Chapter 13 cramdown, even if you’re upside down on your mortgage. If you owe more on your primary home than it is actually worth, you can’t reduce the outstanding balance to fair market value in a Chapter 13 repayment plan. 

If, however, you have an unsecured second mortgage on your primary residence, you may be able to strip that lien completely. 

Upsolve Can Help

If you have a car loan with a balance that is significantly higher than the car’s value, your car payments may be prohibitively expensive, and a cramdown may be of benefit. If you qualify for both Chapter 13 and Chapter 7 bankruptcy, however, the decision to go with Chapter 13 for the sole purpose of a cramdown should be driven by substantial cost savings and/or a strong desire to avoid repossession. Otherwise, filing Chapter 13 might not make sense. Upsolve is a nonprofit organization that provides resources to low-income debtors who are considering bankruptcy. On our website you will find extensive, easily-digestible information on bankruptcy and the disadvantages/advantages associated with each type. 

If you decide to file Chapter 13, it is in your best interest to work with a law firm; Chapter 13 bankruptcy filing is a complex process. A successful outcome is dependent on extensive knowledge of local laws and regulations that generally requires legal advice from an experienced bankruptcy lawyer. If, however, you decide to file Chapter 7, Upsolve offers a Chapter 7 filing tool that allows you to generate and file your bankruptcy forms entirely for free. For more information on bankruptcy and the many different debt relief solutions available to you, visit Upsolve today.