If you find yourself overwhelmed by debt, you may first think about a Chapter 7 bankruptcy. This can help you discharge your unsecured debt, such as money owed on a credit card or to a medical provider. However, there are restrictions, and you may not qualify.
If you qualify for a Chapter 13 bankruptcy, you can restructure your debt under a Chapter 13 repayment plan and force your creditors to accept payment. One of the options under a Chapter 13 restructure is a debt cramdown.
What Is a Debt Cramdown?
This is a legal process that allows you to reduce the principal balance on a secured debt against the value of the property it’s secured to. For example, if you’re filing Chapter 13 bankruptcy and have a secured debt against your car, investment real estate, or certain other properties, you may qualify for a cramdown.
What Debt Is Eligible for a Cramdown?
A cramdown is used on certain secured debts when you are unable to make your loan payments. While most properties do qualify, you may not cram down a mortgage on your principal place of residence. Property that is eligible for a cramdown is a property on which you owe more than the property is worth.
For example, it is commonly known that your car depreciates the moment you drive off the lot. If you financed your car for $15,000 but one year later it’s worth $7,000, a cramdown leaves you with a secured debt of $7,000 or the amount you still owe, whichever is less.
This can reduce your loan balance on the Chapter 13 repayment plan. After three to five years of paying it off, you’ll own the car free and clear. Another benefit of a Chapter 13 repayment plan is the potential to reduce the interest rate on the lower balance.
In this example, you still owed $10,000 on the car. The car was valued at $7,000, so the remaining $3,000 that is more than the value of the car is reclassified as an unsecured debt. In the restructured payment plan, unsecured debt is paid only after you’ve made monthly payments on secured debt and paid the entire balance of priority debt.
Another option in a Chapter 13 bankruptcy is to extend the length of payments on a secured loan. For example, if you had two years left to pay on your car, getting a loan extension could stretch that to four years, which then lowers your monthly payment.
Special Circumstances and Restrictions
Restructuring your debt under Chapter 13 using a cramdown may require you to pay off the mortgage on an investment property within three to five years. This short deadline may create issues. Many debtors cannot pay large sums on a mortgage in a short period.
There are other considerations if you want to use a cramdown on a car loan or other secured loans. If you want to use a cramdown on a car loan, you must have purchased it at least 910 days before filing bankruptcy. If you bought the car any more recently than that, you are not eligible to use the cramdown method. If you have other secured loans, such as on a house remodel or furniture, you must have secured those loans one year or more before filing bankruptcy.
Contact The Law Office of Steven D. Barnette, P.C. for Help if You’re Facing Chapter 13
If you are facing Chapter 13 bankruptcy, there are several ways to restructure your payment plan and protect as many of your assets as possible. Contact The Law Office of Steven D. Barnette, P.C. today for assistance from an experienced bankruptcy attorney.
We recognize that every circumstance is unique. We take the time to listen to the details of your case in order to customize a strategy for your situation. Call us today at 804-693-2274 to schedule a confidential consultation.