When filing for Chapter 13 Bankruptcy, you may be able to reduce the principle balance of a debt to the value of the property it is secured by. This reduction in debt is known as a “cramdown” and can be a valuable instrument in bankruptcy that can save your automobile, investment real estate, and other property. While you can’t use a loan cram down on your primary residence, you can use it to reduce your debt load on all other property.
Cramdowns in Chapter 13 Bankruptcy
With a cram down, you are essentially taking the value of a secured debt item such as a car and reducing what you owe to match the item’s value. This balance can then be placed in with the rest of your unsecured debt in your Chapter 13 bankruptcy. It’s easy to see how this could be beneficial in certain cases and could allow you to pay only a portion of your unsecured debt with the rest being discharged at the conclusion of your Chapter 13 bankruptcy. Other advantages of cramming down your loans with Chapter 13 bankruptcy include the reduction of interest rates, in addition to, stretching the payments across a longer period which could reduce monthly payment amounts. You can also escape liabilities on any deficiencies by utilizing a mortgage cramdown on investment properties.
To many, the cramdown in Chapter 13 Bankruptcy seems too good to be true. While it is a very effective, it also comes with guidelines handed down from Congress that restrict how and when you can use a cramdown. The main cramdown restrictions to keep in mind are the 910 Day Rule on car loans, the One Year Rule on personal property, and the restrictions on investment property mortgages.
The 910 day rule states that for any automobile cramdown you must have owned the car for at least 910 days, or around 30 months, prior to your Chapter 13 Bankruptcy. The One-Year rule is the same as the 910 day rule but applies to other property you own. Cramdowns can be used on investment properties as well, but the balance on the investment mortgage must be paid 100% by the conclusion of your Chapter 13 payment plan.
You should consult your bankruptcy attorney in Houston TX about using cramdowns in your Chapter 13 bankruptcy plan. When used correctly and on the right property, they can be extremely useful in eliminating your debt.