You may feel trapped by your financial woes and be forced to seek out Chapter 13 Bankruptcy relief. But what if you could work out a way to slowly pay off your debt, while at the same time reduce the money you owe?
The best of both worlds is possible in something called Chapter 13 “cramdown.” It’s a way to keep paying towards your outstanding debts while also lowering the sum total of what you owe your creditors.
Explaining a Chapter 13 Cramdown
A normal Chapter 13 Bankruptcy allows you to set up a payment plan to reimburse a percentage of what you owe over a three to five-year period.
It’s an effective option if debtors can keep up with the payments. But sometimes the loans you are responsible for have a higher balance than the items are actually worth. For instance, a car loan balance may sit at $10,000 when your vehicle is only currently worth $7,000. A cramdown can help substantially in this situation.
A cramdown allows you to reduce the balance of secured debt as part of a Chapter 13 Bankruptcy. Secured loans such as a car loan or a loan on household items and furniture are reduced or “crammed-down” when certain requirements are met. In these cases, your monthly payments in Chapter 13 Bankruptcy can lower dramatically.
Lowering Your Car Balance
Cramdowns are most often used to reduce car loans during a Chapter 13 Bankruptcy. Many people owe more on their cars than their vehicles are worth.
When proposing a Chapter 13 payment plan, filers can request that the car loan company reduce the value of the loan to the vehicle’s actual worth. The creditor is forced to comply with the cramdown petition if the bankruptcy court approves the Chapter 13 proposal.
Reducing your Auto Interest Rate
The bankruptcy court can also make your path easier by reducing the interest rate on your car loan.
If a judge finds that your loan’s current interest rate is much higher than average, they can order the creditor to reduce their rates. In fact, the new interest rate is set by the court when they approve your Chapter 13 payment plan.
With these benefits, as long as you pay through your Chapter 13 bankruptcy, your auto loan is much less of a burden as you attempt to emerge from debt. The other good news is that by the end of your payment schedule, you’ll have paid off the vehicle and will get to keep it.
Loan Extension with a Cramdown
You can also use the length of your Chapter 13 payment schedule to lower your payments on any secured loan. While you may have originally had two years to pay back a loan, a loan extension can stretch out your loan to 4 or 5 years. The crammed-down terms would result in lower monthly payments since the length of the loan now extends over many more months.
Cramdown can be used for other secured loans, but you generally cannot apply it to a mortgage for your primary residence. You may use it for other residences or investment properties. The problem with this is that your cramdown usually applies to the three to five-year plan during Chapter 13 Bankruptcy. Your mortgage will likely extend for many more years and many people can’t afford to pay off a mortgage in five years or less.
There are other restrictions your bankruptcy attorney will make sure you’re aware of:
- 910-Day Rule: Concerning a car loan cramdown, you must have purchased the vehicle at least 910 days before you file for bankruptcy. If your car is more recently purchased, you won’t be eligible for cramdown benefits. This prevents people from purposely buying a car when they know they’re headed for bankruptcy.
- One Year Rule: This rule applies to other secured loans you may have. You must have purchased things like household appliances and furniture more than a year ago in order to get help from the courts with a cramdown.
Contact a Los Angeles Bankruptcy Lawyer
Chapter 13 Bankruptcy is a necessary step for many in financial distress. Filers may have to pay off much of the debt they carry, but on the positive side, they get more time to pay off what they owe. What’s more, they can enjoy the benefits of a Chapter 13 cramdown to cut down the total debt that must be paid back and the interest rates on that debt.
When you start to consider if bankruptcy is right for your situation, contact the attorneys with the Law Offices of Steers and Associates in Los Angeles. We’ll work to give you a clear picture of how bankruptcy can help you emerge from a deep hole and regain your financial freedom.
You may also find our online guide to bankruptcy helpful, The Ultimate Guide to California Bankruptcy.
Elena Steers is a highly experienced bankruptcy attorney, the founder of Law Offices of Steers & Associates, and previously worked as a Bankruptcy Trustee Assistant at the Office of the Chapter 13 Trustee in Los Angeles. Her current affiliations include the State Bar of California, National Association of Consumer Bankruptcy Attorneys, and Central District Consumer Bankruptcy Attorneys Association.