What Is It and How Can It Benefit You? What Are the Limitations on Personal Property?
When you are seeking protection from creditors through Chapter 13 debtor reorganization, one option to consider is what’s known as a cramdown. A cramdown typically allows you to pay less than the actual principal balance on secured debt. The cramdown is most often used for motor vehicle debt but, with some restrictions, also may be used with other property. The application of the cramdown option to mortgage debt is significantly limited.
What Is a Cramdown?
A cramdown is a Chapter 13 strategy that allows a debtor to reduce the principal balance of a secured debt to the fair market value of the collateral. The cramdown option typically is used when a loan is “under water,” or when the principal balance due is greater than the fair market value. A cramdown allows you to pay the reduced amount in equal installments over the term of your reorganization plan. The principal amount due in excess of the fair market value is typically considered unsecured debt and treated like credit card and similar obligations.
Why Should You Cram Down a Debt?
When you cram down a debt, you’ll be able to keep the collateral—e.g., a car or truck—while making reduced payments. In addition, because you’ll pay the reduced balance over the term of the reorganization, you’ll own the property free and clear when your Chapter 13 is completed. You also may be able to negotiate a reduced interest rate for the payments. Depending on where you were in the term of the original note, you also may secure a longer period to repay the debt, further lowering your payments.
Cramdown Restrictions on Personal Property
There are two limitations on cramdowns of personal property:
- For motor vehicles, the 910-day rule means that the cramdown option may be used only if the purchase of the vehicle was made at least 910 days before the filing of your bankruptcy petition.
- The one-year rule applies to all other personal property and prohibits cramdowns of debts secured by assets owned for less than a year.
Contact Our Offices
At the Law Office of Andrew B. Finberg, LLC, we bring comprehensive bankruptcy counsel to individuals in Burlington, Camden and Gloucester counties in New Jersey. To schedule an appointment, call our office at 856-988-9055 (toll-free at 866-721-7269), or contact us online.