Many times, when potential bankruptcy clients approach us about their financial options, they are unsure of why people would want to file for a Chapter 13 bankruptcy, apart from being able to keep their home or car. People who file for a reorganization bankruptcy will typically pay back a large portion of their debt over the course of several years, all while having to stay current on payments—how can anyone manage to do this?
The truth is, a Chapter 13 bankruptcy can offer Arizona residents many unique advantages. Besides allowing people to get rid of junior mortgages on their property through lien stripping, which we have previous discussed, a Chapter 13 bankruptcy also allows for something called “cramdowns.”
What is a Cramdown?
A Chapter 13 cramdown allows a filer to take certain secured debts (like car loans and other property debts) and reduce the principle balance owed to the current value of the property, as well as potentially lower your interest rate on the loan. In other words, if you owe more than the property is worth, a cramdown can reduce your principle to what the property is actually worth.
How Does it Work?
Typically, one of the most common applications of a cramdown is to reduce the principle on auto loans. Cars depreciate rapidly, so most people—even people with no financial woes—are upside down at some point in their car loan.
Let’s say that you took out an $18,000 loan to buy a $26,000 car in 2010. The car has now depreciated to about $9000, but you still owe $12,000 on the vehicle. A cramdown will reduce the principle balance on your auto loan to $9,000, and the remaining $3,000 will be treated as an unsecured debt, like a credit card. Over the course of your repayment schedule, you may end up paying off a small portion of your unsecured debt, but after successful completion your remaining unsecured debt will be discharged.
Cramdowns do have certain limitations, however, or else they would really be too good to be true. One very important thing to remember is that you will be unable to cram down the mortgage on your primary residence—only mortgages on investment or commercial properties apply. Most people are unable to successfully cram down a mortgage, however, because crammed down loans must be paid off in full within the three- or five-year repayment plan.
There are important time limits that apply to cramdowns, as well; if you are cramming down an auto loan, the loan must be at least 910 days old, around 2 ½ years. Other personal property loans (like large household appliances) must be at least one year old.
Could a Cramdown Help You?
If you have been considering bankruptcy, and have the income to support a Chapter 13 repayment plan, you may be a good candidate to enjoy the benefits that a reorganization bankruptcy offers. Our Phoenix Chapter 13 bankruptcy attorneys at Curry, Pearson & Wooten are available to discuss your options with you now—call us today at 602-258-1000 to learn what we can do for you.