If you bought something on time, still owe on it, and want to keep it, you may be able to keep it for less money than you owe on it.
Legal Principles to Make Sense of “Cramdown”
- A creditor which has the right to repossess what you bought on credit is a “secured creditor.” The debt you owe to this creditor is secured by whatever you bought, meaning it can repossess what you bought if you don’t make the agreed payments on the debt.
- In bankruptcy, secured creditors have a lot more leverage against you because of this right to repossess than do creditors which have no such collateral to repossess. Creditors that have no right to any of your possessions or property are “unsecured creditors.”
- If you want to keep what you bought and not have the creditor repossess it, Chapter 7 sometimes works fine. But often Chapter 13 gives you more options.
- Secured debts in which the collateral is a home or vehicle are governed by special rules because of how important homes and vehicles are to people, and to the economy as a whole.
- Secured debts where the collateral consists of possessions other than your home or vehicle get less attention, but these debts have some special rules as well. These debts tend to be tied to furniture and appliance purchases, are money loans secured by your previously-owned personal assets, and are business loans secured by business and/or personal assets.
- “Cramdown” can be used only in Chapter 13 cases. It can’t be used at all in Chapter 7 “straight bankruptcy.”
- If the collateral securing a secured debt is worth less than the balance on that debt, and the debt was incurred at least a year before the Chapter 13 case is filed, then the secured debt is divided into two portions: the secured portion based on the value of the collateral, and the unsecured portion consisting of the rest of the debt in excess of that value. For example, if you owed a secured debt of $900 on a refrigerator, which is now worth only worth $500, then the secured portion of that debt would be $500, and the unsecured portion would be $400.
- In a Chapter 13 “cramdown” you pay only part of the debt. The secured portion is paid differently than the unsecured portion.
- You pay the secured portion in full through the payments you make into your Chapter 13 plan, usually with some interest. The payments are usually lower than what the contract would have required.
- You pay the unsecured portion of the debt just like your other general unsecured debts: usually at some percentage of the full amount, based on what you can afford to pay during the applicable period of time (usually 3 to 5 years). That percentage is often low because you have to pay certain other debts in full (like the secured portion of this debt) before these general unsecured creditors receive anything. In the above example, the $900 total refrigerator debt is said to be “crammed down” to $500, and the remaining $400 part of the debt is lumped together with the rest of your unsecured creditors. So if in your Chapter 13 plan your unsecured creditors are receiving 10%, then you would pay only the $500 secured portion, plus 10% of $400, or $40, for a total of $540 (plus some interest on the $500), instead of the $900 plus full interest that you would otherwise owe.
- In a “cramdown,” at the end of a successful Chapter 13 case the portion of the debt not paid would get discharged (written off) at the end of your Chapter 13 case. In our example, the part of the debt beyond $540 would get discharged and you would nothing more on the debt.
So, if you have a debt, at least one year old, secured by something other than your home or vehicle, in which the collateral is worth less than the debt, most likely “cramdown” would reduce the amount of the debt you’d have to pay in a Chapter 13 case. Meet with your attorney to see if this applies to you, and to learn about the other factors to weigh in making an informed decision.