In Chapter 13 bankruptcy, a cramdown is an event that allows someone to reduce the principal balance on secured debt to the value of the collateral securing that debt. In other words, a cramdown can reduce secured debt (such as an auto loan or investment property mortgage) down to the market value of your property.
A cramdown in Chapter 13 bankruptcy is particularly beneficial when the market value of the secured property has significantly fallen. For example, cars lose their value over time and can depreciate by as much as 40% within the first five years of ownership. Investment properties can either appreciate or depreciate in value, but these fluctuations are due to unpredictable market forces more than anything.
If you’ve incurred a lot of fees, fines, and interest that have ballooned the principal balance of your secured debt, seeking a cramdown in bankruptcy is probably right for you.
Are There Restrictions on Cramdowns?
Yes. Cramdowns come with certain restrictions that are intended to prevent abuse of this type of relief, and such restrictions depend on the type of collateral that’s relevant to your secured debt.
Auto Loan Cramdowns: The 910-Day Rule
Cramdowns are mostly used for auto loans, which are subject to the 910-Day Rule. This rule requires that someone must have purchased their car at least 910 days (about 2.5 years) before filing for bankruptcy. This is to prevent someone from immediately filing for bankruptcy to cram down their auto loan.
The One-Year Rule
The One-Year Rule is similar, but it applies to all other personal property. If you used a loan to purchase new appliances, furniture, or any other consumer goods, one year must pass from the date you started the loan before you can file for bankruptcy and seek a cramdown.
A major restriction on a mortgage cramdown is that the mortgage must apply to an investment property. You can’t cram down a mortgage on your primary residence.
Even so, cramming down the mortgage on an investment property can be problematic. Chapter 13 requires the individual in bankruptcy to pay off the loan within three to five years, which may be an unattainable goal even after the cramdown.
Need Legal Assistance? We Can Help.
If you are seeking a cramdown in bankruptcy, Nguyen Law Group can help. Our attorney routinely assists clients who seek debt relief through bankruptcy, and he can help you resolve your debt as well.
Although many people are wary of bankruptcy, it can be the solution you need to deal with overwhelming debt for good. Learn more about how Nguyen Law Group can help by requesting a free initial consultation.
Get in touch with us today by contacting Nguyen Law Group online.