Chapter 13 bankruptcy allows you to reduce the principal balance on a debt to the value of the property in case of secured debt. This is known as cramdown and can help save your debt on real estate investment, car loan and some other properties. Dallas based bankruptcy law firm Recovery Law Group, inform that cramdown can be an asset to reduce the debt on certain secured loans. To know more about cramdown, contact bankruptcy lawyers at 888-297-6023 and discuss about your case.
Secured debts are those assets against which the creditor has collateral. These include car loans and mortgages. Some secure debts can be reduced by cramdown, such as car loan, investment property mortgages or any other personal property (apart from real estate) like furnishings and household goods, etc. However, cramdown is not available on your principal place of residence.
In case your vehicle is worth $5,000 but you owe $10,000 in the loan, you can ask for the cramdown of your loan to the value of the car through your Chapter 13 repayment plan. The remaining amount after cramdown is converted into an unsecured debt and treated in a similar fashion, i.e. discharged at the end of your repayment plan. Thus, you own your car after the end of your bankruptcy.
Advantages of cramdown
There are numerous advantages associated with the cramdown of the loan in Chapter 13 bankruptcy. You can reduce the interest rate and lower your monthly obligations by stretching the payment over a longer period. The interest rate paid to creditors depends on the bankruptcy court and can be lowered than the note rate, thereby reducing the payments you make.
Considering the advantages cramdown has for people filing for bankruptcy, it is expected to have a few restrictions to prevent people from reducing the repayment amount for recent purchases. These include:
• 910-day rule
For cramming down your car loan, the car must have been purchased a minimum of 910-days (nearly 2.5 years) prior to filing for bankruptcy. This is to prevent new vehicle owners from cramming down on their loan immediately after buying the vehicle.
• One-year rule
Like the 910-day rule for cars, this rule is for personal property. You can cramdown loans on household goods that have been purchased at least one year prior to bankruptcy is filed.
• Investment property mortgages
Any loans which are crammed down need to be paid within the time frame of the Chapter 13 repayment plan (3 to 5-years period). This is a practical problem for people who cannot afford to even pay then mortgage of crammed down loans in the specified period.