What is a Chapter 13 Cramdown?

Any debtor in the Oak Park area who is planning to file for Chapter 13 bankruptcy and has secured debt may want to learn more about the ability to “cram down” certain types of secured debt. In cramming down a debt that is secured by property—such as an automobile—you can reduce the principal balance of that debt to the value of the property or asset that secures it. In most Chapter 13 bankruptcy cases, cramdowns are typically linked with automobile loans. However, under U.S. bankruptcy law, a cramdown can also apply to other forms of secured property, such as home appliances and even investment property for which you have a mortgage in some cases. You should know, however, that a cramdown is typically not an option for reducing the debt on a mortgage for your home and principal residence. To be clear, many secured debts can be crammed down, but not all secured debts are eligible.

Understanding Secured Debt

If you are planning to file for personal bankruptcy and are dealing with significant debt, you may already know that there are two different kinds of debt: secured debt and unsecured debt. Your debt is considered secured debt if the creditor or lender has a security interest in your property, which acts as collateral. What this means is that the creditor can feel secure in knowing it can recover if you do not make payments on your debt because it will have rights to the collateral—and can take the asset serving as collateral—if you do not pay the debt. For consumers who are filing for Chapter 13 bankruptcy, the two most common types of secured debt are motor vehicle loans and mortgages. In these examples, respectively, the collateral is the motor vehicle and the home. If you do not make payments on your car loan, the creditor can take back the car through repossession. If you do not make payments on your home loan, the creditor can take back the house through the foreclosure process.

Unsecured debt does not have any collateral attached. Most other types of debt in a Chapter 13 case are unsecured debt, meaning that the lender cannot take specific property from you if you do not pay the debt. Common examples of unsecured debt include credit card debt, medical bills, and student loans.

Should I Consider a Cramdown?

You are only able to cram down secured debt—not unsecured debt—and only certain types of secured debt are eligible. Auto loans are often eligible for a cramdown, but you should speak with a bankruptcy attorney about the specifics of your secured debt.

How does it work? A cramdown reduces the loan balance—the debt owed by the debtor—to the value of the property securing the loan. In the example of a motor vehicle, if you owe $20,000 on a car but the car is only worth $15,000, you may be able to cram down the loan to $15,000 in your repayment plan through Chapter 13 bankruptcy. The rest of the debt balance, or $5,000, can be added to the balance of your unsecured debt and can be discharged once you complete the terms of the Chapter 13 bankruptcy plan.

Contact Our Oak Park Bankruptcy Lawyers

If you have questions about Chapter 13 bankruptcy or a cramdown, you should seek advice from an Oak Park bankruptcy attorney today. Contact the Emerson Law Firm for more information.



See Related Blog Posts:

Bankruptcy and Disability Benefits: What You Should Know

What Should I Expect After I File for Chapter 7 Bankruptcy?

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