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Ask the Court to Reduce (“Cram Down”) Certain Secured Debts

Chapter 13 bankruptcy judges can reduce (cram down) certain secured debts to the market value of the collateral that secures the debt. They can also reduce interest rates to the going rate in bankruptcy cases (roughly 1.5 points above the prime rate). If you can get the judge to reduce your payments on a secured debt, you will have more money to pay towards your mortgage—and a better shot at proposing a Chapter 13 plan that the court will confirm.

EXAMPLE: Allison bought a new car for $24,000, taking back a seven-year note for $38,000 (including the principal and interest), with monthly payments of $475. Three years later, when Allison files for Chapter 13 bankruptcy, she still owes $24,000, even though the car’s market value has fallen to $14,000.

 

As part of her Chapter 13 plan, Allison asks that the note be crammed down to $14,000 and that the interest rate on her loan be reduced to 7%, the approximate going rate in bankruptcy cases. The court approves this cramdown, and Allison’s monthly car payment is cut roughly in half.

A cramdown is usually available only for:

• cars bought at least 30 months before you file for bankruptcy
• other personal property items (furniture, jewelry, computers) bought at least one year before filing
• rental real estate (not your residence)
• loans on mobile homes that your state classifies as personal property (not real estate), and
• loans secured by your home that you can pay off within five years.

You can use a cramdown for rental property you might have, but not for a residential mortgage. Legislation was proposed in Congress in 2008 to expand cramdowns to residential mortgages, but it was hotly contested by the mortgage industry and subsequently dropped from the bill. Someday, Congress may relent and allow judges to provide the same relief for residential mortgages that debtors can now get for mortgages on commercial real estate. Check the foreclosure area on www.nolo.com for up-to-date information on foreclosure legislation.