Cramdowns in Chapter 13 Bankruptcy: The Basics

Chapter 13 Bankruptcy Cramdowns

Are you struggling with secured debts like a car loan, or mortgage debt? If so, chapter 13 bankruptcy may help. This chapter of the U.S. Bankruptcy Code provides a form of debt restructuring that can reduce the amount owed on certain loans and strip away second or third mortgages from your property.

A cramdown is one of the chapter 13 provisions that may be especially helpful to you. Cramdowns in Chapter 13 Bankruptcy are a powerful tool that can be used by debtors here in Portland, Salem, and Medford, Oregon, to modify their chapter 13 repayment plan and achieve financial freedom. This can often result in significant savings for debtors struggling with large amounts of high-interest debt. 

Northwest Debt Relief Law Firm proudly serves Portland, Salem, and Medford, Oregon, with a bankruptcy lawyer who understands the complexities of your chapter 13 bankruptcy case. So if you are considering filing for a cramdown in chapter 13 bankruptcy, be sure to read this article and schedule a consultation with us immediately! 

What is a Cramdown in Chapter 13 Bankruptcy and why are they used?

A cramdown in Chapter 13 Bankruptcy, as stated in the Bankruptcy Code Section 1129(b), is a way for a debtor to modify their repayment plan and reduce the amount owed on certain secured debt. This provision of bankruptcy law allows a debtor to reduce the amount due on this secured debt to the current market value of the collateral instead of paying the total amount. Unsecured debt cannot be cramdown such as credit card debt.

Cramdowns are especially helpful for debtors struggling with large amounts of high-interest secured debt. A Cramdown can help reduce your monthly payment, lower your interest rate or both. A cramdown can also be used to strip away second or third mortgage debt from a real estate property if it exceeds its current market value.

What Types of Secured Debts can be Crammed Down?

Cramdowns in Chapter 13 Bankruptcy can be used to modify the repayment plan of various types of secured debts. These include auto loans, real estate loans, student loans, and other secured debts. 

• Car loan is generally the most common type of cramdown debt, as there is often a significant discrepancy between what is owed on the loan and the current market value of the car.
• Real estate loans can also sometimes be crammed down debts. This happens when the amount owing on a loan exceeds the current market value of your personal property. 
• Student loans are another type of debt that can sometimes be cramdown in Chapter 13 Bankruptcy. However, it is important to note that cramdowns on student loans only apply to private student loans; they cannot be used for federally backed student loans.
• Other types of secured debt that may be cramdown debt in Chapter 13 bankruptcy include boat or RV loans, certain business credit cards, and some tax debts. In each case, cramdowns can help reduce total payments or lower interest rates to make them more manageable for struggling debtors.

What are the Advantages of a Cramdown in Chapter 13 Bankruptcy?

Using cramdowns in Chapter 13 Bankruptcy has several advantages that make it an attractive option for many individuals such as:

• Cramdowns can help reduce total payments or lower interest rates to make them more manageable. This is especially helpful for borrowers struggling with large amounts of high-interest debt.
• Cramdowns can also be used to reduce the amount owed on certain secured debts. This allows debtors to keep their homes and cars even when they owe more than the current market value of these items.
• Cramdowns can strip away second or third mortgages from a property if they exceed its current market value. This is an excellent way for debtors to save money by reducing their overall debt burden.

It’s crucial to remember that cramdowns are only sometimes available in all cases; each situation must be evaluated separately based on individual circumstances, and creditors must agree to any proposed modifications before they can take effect.

What are the Disadvantages of Using Cramdowns in Chapter 13 Bankruptcy?

The disadvantages of using cramdowns in Chapter 13 Bankruptcy should not be overlooked. Debtors should understand that cramdowns may lower their credit score and could negatively impact their ability to borrow money in the future.

• Cramdowns may also increase the amount of time required before a debtor is able to secure fresh financing or open new accounts with creditors. 

• Another disadvantage of cramdowns is that debtors must prove to a bankruptcy court that repaying their debts in full would be too difficult and would cause an “undue hardship” for them or their families. In order to do this, debtors must submit documentation showing how much income they have, how much debt they owe, as well as other information related to their financial situation.

If a debtor cannot provide evidence that proves an undue hardship exists, then a cramdown may not be approved by the bankruptcy court and they will still be required to pay back their debts in full.

• Cramdowns can also require debtors to make payments over a longer period of time than other types of bankruptcy proceedings, such as Chapter 7 bankruptcy. This means that even though cramdowns may reduce total payments or lower interest rates, it could take significantly longer for debtors to become debt-free than with other forms of bankruptcy filings.
• Finally, cramdowns also require additional paperwork and there may be additional legal fees associated with bankruptcy filing for one. Debtors need to understand these additional costs so they can factor them into any calculations when deciding whether or not cramdown is right for them.

Cramdowns can be useful for debtors struggling with large chunks of high-interest secured debt. However, it’s crucial to understand any potential drawbacks as well as the burdens associated with filing for one before deciding if cramdown is the right option.

What are the Limitations on Cramdown in Chapter 13 Bankruptcy?

To avoid any unfairness caused by individuals attempting to cram down recently acquired property, Congress has enforced particular limitations on when this action can be taken. The guidelines correspond with the type of asset safeguarding the debt an individual wants to cram down.

910-Day Rule

910-Day Rule is a formal restriction set out by Congress to protect both the individual filing bankruptcy and their creditors. This rule prevents individuals from purchasing an expensive asset shortly before they declare bankruptcy and then cramming down the debt associated with it. The 910-Day Rule ensures that everyone is treated fairly during the bankruptcy process.

One-Year Rule

This rule requires individuals to own goods they purchase for at least one year before they can decrease the debt associated with them when filing bankruptcy. The intention behind this regulation is twofold: it prevents people from attempting fraud against their creditors while also encouraging the responsible use of private possessions.

Investment Property Mortgages

Under the Chapter 13 Bankruptcy code, a restriction is placed on Investment Property Mortgages when it comes to cramming down the debt structure. These types of loans can become very difficult for borrowers to pay off such mortgages because of the three to five-year timeframe limitation.

Contact our Portland, OR Chapter 13 Bankruptcy Attorney Today!

When it comes to cramdowns in Chapter 13 bankruptcy, the answer to whether or not it is worth it depends on the individual situation. Cramdowns can present both benefits and risks when considering filing for Chapter 13 bankruptcy. It is important for individuals contemplating this option to weigh all possible scenarios carefully so they understand exactly what they are getting into before committing themselves financially.

At Northwest Debt Relief Law Firm we know cramdowns in Chapter 13 can be confusing and intimidating. That’s why our experienced bankruptcy attorney is here to give you legal advice through the process. Let us help you navigate cramdowns in Chapter 13 bankruptcy and get back on the path to financial freedom. 

Call us today for free debt solution consultations and get on the path toward financial freedom! Don’t wait. Start your cramdown in Chapter 13 bankruptcy today!