A Cram Down in a Chapter 13 bankruptcy allows you to reduce the principal balance of a debt to the value of the property it is secured by. You may be able to save your car, investment real estate, or certain other properties, by taking advantage of a Chapter 13 Cram Down.
You are allowed to cram down certain secured debts. A debt is considered secured when your lender has a security interest in your property and can repossess it if you fail to make your loan payments. The most common examples of a secured debt are your mortgage and car loan. In a Chapter 13 bankruptcy, you can cram down your car loan, investment property mortgages, or other personal property (besides real estate) loans such as household goods and furnishings. You can’t cram down a mortgage on your principal place of residence.
Cramming down your loans through a Chapter 13 bankruptcy may also allow you to reduce your interest rate and stretch your payments out over a longer term in order to lower your monthly obligations. The interest rate paid to secured creditors through your plan is determined by the bankruptcy court and will usually be lower than your note rate. In addition, since Chapter 13 plans last three to five years, you may be able to stretch out the payment period for the crammed down loan, resulting in lower monthly payments than if you were paying the loan outside the bankruptcy.
Congress has placed certain restrictions on when you can use a cram down to prevent people from cramming down their recent purchases. These restrictions depend on what kind of property is securing the debt you wish to cram down.
910-Day Rule – If you want to cram down your car loan, you must have purchased the car at least 910 days prior to the bankruptcy, that’s about 2 and a half years. This prevents people from buying a new car and cramming down the loan right soon after driving it off the lot.
One-Year Rule – This rule is similar to the 910-day rule for cars but it applies to all other personal property. It is usually relevant if you are trying to cram down loans on your household goods and requires that the goods be purchased at least one year prior to the bankruptcy before a cram down is allowed.
Investment Property Mortgages – Most courts require that loans that are crammed down be paid off within the three to five year length of your Chapter 13 plan. This creates a practical problem for most people who want to cram down their investment property mortgages because they do not have the means to pay off a mortgage (even a crammed down one) in this short of a time period.