Many Georgians have contacted our office to discuss the advantages and disadvantages of filing for bankruptcy due to the economic struggles families across the country are experiencing on account of the recession. Depending on an individual’s or a household’s personal circumstances, filing bankruptcy may be the best way to alleviate heavy debt burdens and move forward in 2015 with a clean financial slate.
Once the decision to file bankruptcy has been made, the person filing the bankruptcy (called the debtor) may choose to file Chapter 7 or Chapter 13 bankruptcy. Not everyone is eligible to file both types of bankruptcies and each Chapter offers its own advantages and disadvantages which you can read more about it here. By working with an experienced attorney, Georgians are better able to understand their bankruptcy options and make an informed decision on which Chapter is best-suited to their needs and goals.
One of the advantages of Chapter 13 bankruptcy is the opportunity to “cramdown” or reduce the balance of a debt in certain situations. Read on to learn more about the Chapter 13 cramdown.
What is a Cramdown and When Can I Do It?
When you cramdown a secured debt in Chapter 13, you are basically reducing the balance of the debt down to the property value of the asset that is securing the debt. The big advantage of the cramdown is that it may allow you to keep certain assets, such as your car or real estate investments, which you may otherwise have been required to sell during the bankruptcy process.
You can only cramdown secured debts. A secured debt is one in which you have put up some sort of property in order to obtain the debt, and the lender can repossess that property if you do not pay the debt. A car loan, which is secured by the car itself, is a common example of a secured debt.
How Does a Cramdown Work?
Since many debtors use the cramdown procedure in order to keep their cars during bankruptcy, it is a good example of the process. Let’s say you have a car that is worth $10,000 but the balance of your car loan is $20,000. The cramdown allows you to reduce the balance of your loan to $10,000 – the value of the car – for the purpose of your Chapter 13 repayment plan. In doing so, you will likely only be paying a percentage of that already reduced debt and the remaining balance will be wiped away at the conclusion of your Chapter 13 plan – and you will get to keep your car.
The Other Benefits (and Restrictions) of the Chapter 13 Cramdown
As you can see, the cramdown offers obvious benefits during the bankruptcy process. In addition to the decreased loan amount, cramming down a debt can also result in reducing the loan’s interest rate and lowering the monthly payments by spreading them out over the period of the repayment plan. The bankruptcy court determines the interest rate and it is often lower than what the original loan note established.
However, there are restrictions on the cramdown procedure. Congress has established certain regulations to make sure debtors are not using the cramdown system to reduce their debt liabilities on recent purchases. For example, there is something called the 910-day rule which states you can only cramdown a car loan if the car was purchased at least 910 days before you file for bankruptcy. Additionally, there is another rule called the one-year rule that prevents you from cramming down any loans for household goods unless the goods were purchased at least one year before you file for bankruptcy.
To learn more about whether Chapter 13 is a good option for you, contact our office today to speak to an attorney about your case. We look forward to speaking with you!