When you file for bankruptcy, you may be able to take advantage of a process known as a “bankruptcy cramdown.” If you have a secured debt and you file for Chapter 13 bankruptcy, this can help you eliminate some debt and reduce how much you end up paying in interest. A Bergen County Chapter 13 bankruptcy lawyer from our firm can tell you more.
How Does a Bankruptcy Cramdown Work?
A bankruptcy cramdown can only be used on a secured debt. That means that there is a form of collateral backing the loan. Credit card debt and medical debt are unsecured debt, so there’s no way to “cram” that kind of debt down.
When you use a bankruptcy cramdown, you take the loan that you owe and compare it to the value of the collateral. If the loan balance is higher than the value of the property that you took out the loan to buy, a cramdown could be possible.
Can I Use a Bankruptcy Cramdown On a Car Loan?
A car loan is actually a perfect example of a secured debt that can be addressed in this way. Let’s say that you owe $15,000 on a car, but when you value your vehicle it’s actually only worth $10,000. This is something that can happen when you take out a car loan. At certain points, you owe more than the car is worth.
If this is the case when you file for Chapter 13 bankruptcy, a bankruptcy cramdown allows you to reduce your remaining loan to match how much the asset is actually worth. So this means that you can keep paying your loan, which is now only $10,000, and keep your vehicle. The other $5,000 gets rolled in with your unsecured debts and becomes a part of your payment plan.
This is beneficial because it can reduce how much interest you have to pay on your car loan. It also affects how much you pay back overall. Not only is your loan less of a burden now, but that remaining debt that got rolled into your bankruptcy payment plan may not have to be paid off completely. As long as you satisfy your creditors, your payment plan should be approved.
Are There Rules and Restrictions to Be Aware Of?
There are a few rules about when and how you can use a bankruptcy cramdown though. You should know about:
The 910-Day rule: You need to have purchased your car at least 910 days ago if you want to cram down a loan on it.
One-year rule: This applies to other personal property, like household goods.
Investment property exceptions: You do need to pay off any debts within three to five years under Chapter 13 bankruptcy rules, meaning that it can be difficult to address investment property mortgages with a cramdown.
Talk to a Bankruptcy Lawyer
If you are thinking about filing for bankruptcy, you should speak to a lawyer. Contact the Law Office of Boyd & Squitieri to schedule a consultation with our team. We can help you figure out if this is the right option for you.
