Cram Down in Bankruptcy
One advantage to filing for a Chapter 13 Bankruptcy is the option to “cram down” certain types of secured debts, including cars, trucks, and motorcycles. Cramming down quite simply means that the amount owed will be reduced to the fair market value of the items. Often times the value of an vehicle depreciates much faster than the payments are made. For example, let’s consider that an individual purchased a vehicle in July 2010 for $15,000 dollars. The monthly car payment is $250 dollars. For ease of understanding we will exclude interest calculations in the example. In February of 2012 that individual will have paid $5,000 dollars towards the vehicle, leaving a remaining balance of $10,000. However, in the time the person has owned the vehicle it has depreciated due to normal use and age. So now, if the car is valued at $7,000 dollars the individual owes $3,000 dollars more than the value of the car. In a Chapter 13 proceeding it is possible to cram down the amount owed to the fair market value of the vehicle. Fair market value can be determined by appraisals or commonly accepted authorities, such as Kelley Blue Book values. It is important to note that where an individual has a substantial amount of equity in the vehicle and they owe less than what the vehicle is worth the individual will be required to pay the amount owed under the loan.
There are certain qualifications for cramming down the amount owed to the fair market value. The asset must be personal property guaranteed by a secured loan. This simply means that the creditor can take a vehicle used for personal use in the event the debtor defaults on payments. The most common example of a secured loan is a vehicle purchased from a dealership. Furthermore, when talking about vehicles for personal use, the loan must have been taken out more than 910 days prior to filing for bankruptcy to be eligible for cram down.
When a debt can be crammed down it is then rolled into the Chapter 13 reorganization plan and paid back over 36-60 months, depending on the plan you choose. This means that not only is the amount the individual pays back decreased, but the payments may still be lower as the individual will have more time to make payments. As with anything in a Chapter 13, at the end of the repayment plan the vehicle is yours and you will not own anything further on the vehicle.
In the example above we ignored interest for ease of calculation and understanding. However, when a debt is crammed down interest will still be calculated, though it will not be the amount of interest on the original loan. Missouri uses the formula approach to calculating interest on the loan. The court will first look at the national prime rate for credit worthy lenders. The court will then adjust that rate to account for the increased risk a non-payment with a debtor in bankruptcy and will account for duration of the plan, feasibility of the plan, and the type of security.
There are a few more things to consider concerning cram down. If there is a co-signer on the loan who is not a part of your bankruptcy, i.e. a friend, parent, or significant other, the cram down will not apply to that persons obligation. Using the example above, if our debtor had a co-signer that was not a part of his bankruptcy the debtor would only owe $7,000 dollars, however, the co-signer will still be responsible for the full 10,000 left on the loan. This means that creditors can take action to recover the $3,000 difference between the cram down and the original loan value from the co-signer.
If you still have questions about cram down contact a St. Louis Bankruptcy Attorney today.