There are many rules about filing for bankruptcy, which is why we recommend only filing when you have assistance from a New City bankruptcy attorney. A lawyer can also help you take full advantage of any of the benefits offered by the bankruptcy process, including a tool known as a “bankruptcy cramdown.” Here’s what you should know before you file.
Which Type of Bankruptcy Allows a Bankruptcy Cramdown?
First, it’s important to note that a bankruptcy cramdown is only allowed in a Chapter 13 bankruptcy, Chapter 7 filers get no such option. A cramdown can only be used on a debt where the lender has some kind of interest in the property. It reduces the value of the loan you owe, and then it takes that remaining amount and puts it with the rest of the unsecured debt that you are trying to wipe out through bankruptcy, like credit card or medical debt. Then you can continue paying your loan while you make a payment plan.
What Kind of Debt is Ideal for Bankruptcy Cramdown?
Let’s look at some examples. A bankruptcy cramdown is ideal for secured debts. A car loan is often one of the best candidates for this.
If you owe $10,000 on your car, you might do some research and realize that it’s actually only worth $8,000. This can happen at some points while your car is being financed, putting you “underwater” on the loan.
A bankruptcy cramdown allows you to reduce the value of that loan to match the actual value of the collateral. So you can keep paying the loan, but you only owe $8,000 now. That can save you money on interest and total payments.
That $2,000 you took off the loan will be lumped in with your other unsecured debts and become a part of your payment plan. You’ll pay off that amount or at least a portion of it over the next three to five years.
When is This Practice Restricted?
When you want to use a bankruptcy cramdown, you usually need to prove that you have had the property for a while. The 910-day rule exists for cars, meaning that you must have owned the car for at least 910 days before trying a cramdown during bankruptcy. This is to prevent people from buying a brand-new vehicle and then filing for bankruptcy in an attempt to game the system. Other types of personal property could be subject to similar rules.
You should also be aware that a bankruptcy cramdown can be used on investment property mortgages, but that’s not always feasible. You would have to pay down those mortgages within three to five years, and that can be tough to do. A lawyer can advise you on the best path forward.
Talk to a Bankruptcy Attorney
If you think that filing for bankruptcy may be your best option, contact the Lauterbach Law Firm. We can help you figure out if this process will work for you and get you the fresh financial start you’re searching for.
