As you may know, a chapter 13 bankruptcy is a reorganization bankruptcy where you establish a repayment plan that usually lasts 5 years. Typically, the repayment plan is based on a budget that is created by looking at your net income and then your expenses. One of the many benefits of a chapter 13 bankruptcy is the availability to lower or “cram down” a debt from the current loan balance to the value of that debt.
Debtors are allowed to cram down secured assets, including vehicles, household items and investment properties. The benefit of a cram down includes extending the loan period and lower interest rates, which mean a lower payment. For example, let’s say you have a vehicle loan for $10,000 at an interest rate of 15%, but the vehicle itself is only worth $5,000. So, in a chapter 13, we would lower the value to $5,000, or cram down the balance from $10,000 to $5,000 and the interest rate from 15% to 6%. Then, whatever balance that remains is treated as unsecured debt. That unsecured balance will either be paid back pennies to the dollar or not paid back at all and completely discharged at the end of your chapter 13.
However, there are restrictions to cram downs. You can’t obtain a vehicle loan one day and then file a chapter 13 the next month to cram down the loan. There’s a 910 day rule that basically says your loan has to be 910 days or 2 ½ years before you can cram down the loan. If you wanted to cram down a household item, then the waiting period is one year.
Let’s say you have an investment property, which you can cram down; however, is it a good idea to cram it down? It depends. For example, let’s say you have an investment property with a loan of $300,000 but it’s only worth $200,000. You can cram down the loan to $200,000, but in many cases, a debtor can’t afford to pay back $200,000 over a 5 year time period, so there’s a balloon payment at the end of your chapter 13, which will probably be very high. So, in this instance, it may not be worth it to cram down an investment property.
But, every case is different and there may be other factors to consider if you should or shouldn’t cram down a secured loan. So, if you’re thinking of filing for bankruptcy, and or if you have questions or are ready to get your life back, reach out to Minnesota’s nicest bankruptcy law firm by going to www.lifebacklaw.com. You won’t regret it!
