Understanding Cramdown In Bankruptcy
Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina.He has also earned an MFA in screenwriting from Chapman Univer…
What Is A Cramdown In Bankruptcy
Lets say that you own a piece of property that is worth $500,000. The problem is that you owe $700,000 on the property, making it $200,000 upside down .
Assuming that you dont want to keep the property, you can surrender it, and although the property will be taken from you, the good news is that you will never owe the difference the way that you would if the property was just foreclosed on by the bank.
So that leads to an interesting question. If the bank cant go after you for the balance on a loan that is not secured by the value of the property , can you file for bankruptcy, keep the property and wipe out the excess $200,000, since its dischargeable debt anyway?
Cramdowns Are Possible
That is what is known as a cramdown. A cramdown is where a consumer files for bankruptcy, and the amount owed on secured property such as homes, property and cars, is lowered to the value of that property. In our example above, the $200,000 would be wiped out, and the amount owed lowered to $500,000, the market value of the property. At the end of the bankruptcy, the consumer owns the property and only owes the $500,000.
A cramdown is generally not possible in a Chapter 7 bankruptcy. However, in some circumstances, it may be possible in a Chapter 13 bankruptcy. The big caveat though is that cramdowns are not possible for property that is someones primary residence.
Moving Out to Get the Cramdown
Cramdowns on Cars
Paying Through the Plan
What Is The Latest News On Cram Down
It looks like the Cram Down Bankruptcy Reform will not be part of the economic stimulas package presently before Congress. But good news, is that President Obama will push for the Cram Down soon thereafter. Per a recent email I just received:
I wanted to keep you in the loop on judicial modification, one of our legislative priorities. As some of you may already know, the judicial modification of mortgages legislation will NOT be part of the economic recovery package now under consideration in the House and Senate. My understanding, confirmed by reporting on the same, is that President Obama in a meeting on Friday specifically asked Democratic leaders not to include it in the package as he seeks to build Republican support for the recovery package. The good news is that in the same meeting President Obama reaffirmed his support for the legislation and said that the Administration will look for a quick moving vehicle to which the legislation would be attached. Among other possibilities is the 2009 omnibus appropriations bill, which congressional leaders hope to pass in the short term. We will keep you posted on new developments in this regard.
In the meantime, the House Judiciary Committee is marking up H.R. 200 at 1 p.m. today. Chairman Conyers will offer a managers amendment at that time that will include language reflecting the agreement reached with Citi.
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How Does The Cram
In order for the court to confirm the rejected bankruptcy plan, the debtor must prove that it is fair, equitable, and does not discriminate against a class of creditors. For instance, if there are two or more creditors of the same class and one of those creditors receives a significantly lower recovery than the others of the same class, that could be considered discriminatory. A secured creditor must receive the entire value of the asset securing the claim or the entire value of the claim, whichever is smaller, in order for the plan to be considered fair.
Unsecured creditors voting by class must either accept the Chapter 11 plan or the owners of the debtor corporation cannot retain an interest in the reorganized debtor under the plan unless they contribute new value to the plan.
Finally, a plan cannot be confirmed if the plan does not pay each claim holder as much as he would have received under a Chapter 7 liquidation unless those who receive less accept the plan. Before a cram down is requested, obtain counsel from a qualifiedLos Angeles business bankruptcy lawyer. An attorney can argue your position to the court in an attempt to support the cram down and make sure your rights are protected.
The Means Test Effect On Cramdown
Another issue which may get in the way of cramming down a car loan is a case whereby reason of the Chapter 13 Means Test ) the Debtor is required to pay 100% of the Debt back to general unsecured creditors. In this type of case, the loan can still be bifurcated into secured and unsecured, with interest being required only on the secured portion of the debt. The auto loan would still need to be more than 910 days old in this situation, and the creditor can claim WSJ Prime Rate plus 1-3 points for the interest rate ( Where Prime Rate is 3.5% on date of Filing, interest rate on the secured part of the claim inside the plan would be between 4.5% to 6.5% as negotiated with the creditor, usually via their legal counsel.
If you have further questions about whether your auto loan can be crammed down in a Chapter 13 case, please do not hesitate to contact Bankruptcy Attorney Kevin Ryan at 241-5234 or by sending an email to him through this website.
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When Can You Cram Down A Car
Im often asked when a car can be crammed down in bankruptcy.
First of all, what is a car cram down?
When a debtor owes more on their car than it is worth, a cram down will cram down the amount that the debtor owes on the car, to be equivalent with what the car is actually worth. This simple technique can save the debtor thousands of dollars in what they owe on their car, not to mention the interest on that amount.
There are some rules about how to do this though, as outlined below:
The above will help you determine if your debtors car loan qualifies for a cram down. If their situation meets all of the above criteria, all you have to do in the petition is remove any arrearages that might have been reported for the car loan in the petition, and change the claim amount for the loan from the amount that the debtor currently owes, to the amount that the car is actually worth.
How do you determine how much the car is worth?
There are several excellent online sources for determining the value of a car. Two of the most widely used are:
Simply go to either website, and youll find that you can enter any later model vehicle, and find the value of it.
Find Out How To Reduce The Principal And Interest Owed On Financed Property In Chapter 13 Bankruptcy
By Cara O’Neill, Attorney
If you owe more than what your financed property is worth, a Chapter 13 bankruptcy might let you pay less by reducing the debt’s principal balance and interest rate. In this article, you’ll learn about a procedure called a “cramdown,” and the rules that apply to real estate, your car, and other personal property .
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Jul Bankruptcy Basics: What Is A Cram
So, you meet with an attorney to discuss your options in bankruptcy. The attorney discusses a chapter 13 and says that you can cram-down your car in a chapter 13 case. Cram what!? I like the thought of cramming something somewhere for a particular creditor but what exactly is a cram-down?
Under chapter 13, a debtor may modify the rights of holders of secured claims. This means we can change the terms of the contract, that is, modify the deal between you and the creditor in your chapter 13 bankruptcy case.
For example, as we all know, as soon as you drive a new car off the lot, it loses quite a bit of value. See here. So, unless you put a big down paymenton a car, as soon as you drive off the lot, you are now upside down on the car. That is, you owe more on the car than what it is worth.
According to the papersyou signed, you agreed to pay the entire debt and it really does not matter that the car is worth less than what you owe. That is why, outside of bankruptcy, if a car is repossessed andthe car issold at an auction,there oftenstill is a substantial amount of money owing on the contract or note .
It must be stressed that a cram-down is limited. If you are attempting to cram-down a motor vehicle, you must have owned the vehicle for at least 910 before you can cram it down . Also, it does not apply to real estate that you use as your primary residence.
Limitations On Cram Down/strip Down
The auto finance industry was not too pleased with the effect that Cram Down/Strip Down was having on their Secured Claims, and the Bankruptcy Abuse Prevention and Consumer Protection Act now places limitations on a Chapter 13 Debtors ability to use this process when dealing with Purchase Money Security Interests , .
If the collateral for a PMSI debt is a motor vehicle acquired for personal use within 910 days prior to the Chapter 13 filing, the debt cannot be stripped down to the value of the vehicle.
If the collateral is not a motor vehicle, the prohibition on strip down only applies if the PMSI debt was incurred within one year prior to the bankruptcy filing.
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Talk To A Bankruptcy Lawyer
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Cramdown Why It Is Useful
This cramdown provision is very useful when your residence or car is at risk. Using cram-down in bankruptcy would help debtors to lower their debt amount in accordance with the value of property at risk.
Also, it would allow debtors to increase the duration of the payment plan, reduce the interest rate, as well as the monthly payment. The bankruptcy court decides the interest rate, and it is generally lower than the current rate. Also, the Chapter 13 bankruptcy usually lasts for three to five years. So, you can extend the duration of your loan till the bankruptcy period, and thus, reduce your monthly payments.
Moreover, when you file for Chapter 13 bankruptcy, you could be able to keep the ownership of your property.
Basically, when you cram down a loan, the court reduces the amount of debt to reflect the value of the property at risk . In other words, the outstanding loan amount could be reduced to the extent of the market value of the security given as collateral. The lowered amount will show in the Chapter 13 payment plan. And the remaining loan balance is usually clubbed with unsecured debts and is paid after the reorganization plan completes. Usually, debtors may never pay unsecured debts in a Chapter 13 bankruptcy. Or, at the most, these debts are paid partly in the last leg.
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How Do I Cram Down My Loans
Most people use Chapter 13 bankruptcy to cram down their car loans so here we’ll use a car loan cramdown to illustrate how a cramdown works.
For example, if you own a car worth $5,000 but your loan balance is $10,000, then you can cram down your loan to $5,000 through your Chapter 13 repayment plan. The remaining $5,000 of the balance will be lumped in with your other unsecured debts . This means you’ll likely pay only a percentage of that unsecured debt, and the remainder will be wiped out at the completion of your plan. This means you will end up owning the car free and clear at the end of the bankruptcy.
Do You Need Legal Assistance
Getting a cramdown of your debt during bankruptcy can provide much-needed relief if youre trying to reorganize your debt. Reducing the principal, interest rate, or extending the repayment period can make it possible to manage your financial obligations through reorganization and eventually get out of debt.
Its always important to have an experienced lawyer represent you in bankruptcy court to maximize the impact of a cramdown. For more information about what our cramdown attorney in Massachusetts can do for you, request a consultation by reaching out to us today!
Get in touch with Kovacs Law, P.C by calling or bycontacting us online.
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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 mortgage is equal to or more than the propertys value.
How A Cramdown Works
A cramdown provision is primarily used on certain secured debts, such as a car or furniture. Cramdowns are not permitted on mortgages for homes that serve as a primary residence.
Outlined in Section 1129 of the Bankruptcy Code, the cramdown provision allows a bankruptcy court to ignore the objections of a secured creditor and approve a debtor’s reorganization plan as long as it is “fair and equitable.”
The term “cramdown” comes from the idea that the loan changes are “crammed down” creditors’ throats. A cramdown may be called a “cram-down deal” to refer to any unfavorable deal forced on creditors by circumstance. In personal bankruptcy, a debtor may either renegotiate a loan through a Chapter 13 reorganization or risk losing everything through a Chapter 7 filing, which gives secured creditors far more leverage.
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Restrictions In Using Cramdown
Section 1129 of the Bankruptcy Code defines the cramdown provision. This section gives power to the bankruptcy court to go ahead with the debtors reorganization plan despite the objections of some of the class of creditors. Provided the plan is fair and equitable in the eyes of the court.
The cram-down provision is usually applicable for secured debts, as reduction can be done with reference to the security value. But, the court doesnt allow such provision on home mortgages, which is also the primary residence of the debtor. However, such a provision is allowed on other personal property, like a car, furniture, and more. Also, you can use this provision on other types of real estate property, including rental homes and investment property.
But, one can only use such a provision after the passage of a certain specific time for that asset. If the asset does not meet the minimum time criteria, then the debtor can not use cramdown. The time period rule ensures that debtors do not cram down their debt immediately after buying a new asset.
For a car, the minimum time period is usually 912 days. This limitation may not apply if the vehicle is for commercial use. For other types of personal property, such as household appliance and furniture, the minimum time period is usually a year.
Lenders Must Prepare For Real Estate Bankruptcy Cramdowns
The unprecedented disruption in the real estate markets caused by COVID-19 has lenders thinking again about possible bankruptcy filings by their borrowers. Loans secured directly or indirectly by lodging, retail, gaming and retail assets are under particular distress.
During the real estate downturn in the early 1990s, real estate owners and operators often filed for bankruptcy protection as a negotiating tactic and as a means of shielding their assets from foreclosure. These cases, which often dragged on for years at enormous expense, often had the desired impact of altering the negotiating leverage with lenders.
The COVID-19 crisis is arguably much worse than the financial crisis of 2008-2009, and poses a much different set of risk factors and solutions for real estate investors and lenders. The stay-at-home order has shuttered almost every industry that utilizes real estate to conduct their businesses. In prior downturns, the real estate investors and lenders relied on the then certainty of continued tenant occupancy and rent payments and, in the case of hotels, inherent demand drivers, even if capitalization rates expanded as a result of a shrinking economy, scarcity of financing options and/or a financial crisis.
During the pendency of the financial crisis of 2008-2009, the number of real estate bankruptcy filings was limited. The reason for this was twofold.
Timing of Confirmation
Voting or Claims to Block Confirmation
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