What is Chapter 13 “Cram-down”?

Chapter 13 bankruptcy in Utah County is a consolidation of debt and a partial repayment over a period of three to five years, based on the debtor’s ability to pay. Sections 1322 and 506 of the bankruptcy code permits bankruptcy courts to reduce the balance or “cram-down” unsecured debt. This essentially converts property that is secured (collateral is attached to the loan like a home, automobile, or other property) to unsecured debt.  Because unsecured debt is paid last in a chapter 13 plan, this often means the creditor receives little or no payout during the chapter 13 plan for the unsecured portion.  Debts that are not fully repaid during the chapter 13 plan are then discharged.

Cram-down of Vehicles & Personal Property

A common example of cram-down is a vehicle. Since vehicles depreciate (become less valuable) over time, it is not uncommon for a debtor to owe more on the vehicle than its current fair market value.  When this happens, the debtor can cram-down the amount owed in a chapter 13 bankruptcy and only pay the fair market value to keep the vehicle. This also applies to other debts secured by personal property–such as RC Willey and other furniture stores, tire stores, and others.

Limitation on Personal Residence

There is a limitation to cram-down on personal residences. Section 1322 does not permit cram-down on a personal residence, unless the debt is wholly unsecured.  In a practical sense, this means that only second mortgages are subject to chapter 13 cram-down– and only when the amount owed on the first (primary) mortgage is equal to or more than the property’s value.

Personal Residence Limitation Does Not Apply to Investment or Secondary Homes

The limitation on the personal residences described above, however, does not apply if the home is not the “primary residence”.  This means that cram-down is available on all second homes or investment properties to the extent that ANY portion of any debt is under-secured.  It does not have the all-or-nothing limitation like a personal residence.

For these reasons standing alone chapter 13 is a financially preferable strategy to chapter 7 bankruptcy, loan modification, or informal debt consolidation when the debtor’s situation avails itself to a cram down.

Schedule a Free Chapter 13 Evaluation today, to determine if Chapter 13 bankruptcy is right for you!

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