Bankruptcy A-Z: C is for Cramdown
December 21st, 2011 | 
Author: Bankruptcy A-Z: C is for Cramdown.
In Chapter 13 cases, debtors can reduce (or cram down) certain claims to the value of the property and pay it out over time with low interest.
C is for Cramdown.
A client of mine owned a car valued at only $8,000, but he owed $15,000 and was paying 17% interest. When I filed his Chapter 13 plan, I proposed to pay the car off over 3 years at 4.25%. The client got to keep the car as long he made the payments. The remaining $7,000 was paid at a small percentage along with his credit cards, medical bills and other unsecured debt through the Chapter 13 plan.
For another client, I was able to cram down the debt on her rental property to the value of the real estate. She had to pay it off over 5 years, but her interest rate and total debt were much less. As long as she finished her plan, her mortgage would be paid off and released.
There are limits. The first one is time. If the debt is on a car, the debt must either be a refinance or must be more than 910 days old. If the debt is on other personal property, the debt must either be a refinance or must be more than 365 days old.
The second limit applies to the type of property. While cramdowns work on personal property, they only work on real estate if the property isn’t your primary residence or if the lien includes something else, like a combined car and real estate loan. Credit unions and small banks may do this; it is called cross-collateralization.
The last limit is financial. First, the value of the property must be paid off within the length of a Chapter 13 plan, between 3 and 5 years. Second, you must pay interest. Finally, the payments must be same over the life of the payout.
Cramdowns work wonders when the property is worth much less than what is owed on it. Too bad it doesn’t work for client’s homes.
There are drawbacks to using the cramdown. First, you have to make payments through the Chapter 13 plan, which requires paying the trustee’s fees (though you should still save by reducing what you pay). Second, if the case is ever converted or dismissed, you will be behind on payments, because you were not making the contract payments. Third, for personal property it may take longer to get the title to the property, and for real estate, you may have to pay it off faster or find someone who will refinance it.
Chapter 7 has its own methods for cramming down property – redemptions. More on that later.
If you need to protect your assets from creditors and are in the metro Richmond area, or anywhere in central Virginia, contact bankruptcy and consumer lawyer Mitchell Goldstein at (804) 592-1674 or by email at mitch at mitchellpgoldstein dot com.
Other C posts:
C is for Collection Agencies.
C is for Competence and Compassion.
C is for Conversion.
C is for Cosigner.
C is for Counseling or credit counseling or credit counseling.
C is for Cramdown or Cramdown.
C is for Creditor or Creditor.
C is for Creditors Meeting.
C is for Cars.
Photo Credit: Caroline_Carter88
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