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How can a “cramdown” help people filing for bankruptcy?

On Behalf of | Mar 10, 2024 | Bankruptcy

Unlike Chapter 7 bankruptcy, in which much of a person’s debt can often be discharged, Chapter 13 requires a debt reorganization plan where a repayment schedule is worked out with the court. That doesn’t always mean, however, that creditors get everything that’s owed them.

For example, sometimes the court changes the terms of a debt to make it easier for the debtor to repay the creditor – even if the creditor objects to the new terms. That’s known as a “cramdown.” It can be used in Chapter 13 as well as Chapter 11 bankruptcies. The process is allowed under the federal Bankruptcy Code.

How much can the court reduce a debt?

Typically, cramdowns are used for secured debt, like car loans. However, they aren’t used for mortgages for homes that are primary residences. In a cramdown, the court orders a creditor to require payment for the fair market value (FMV) of the collateral that secures the debt. 

In many cases, this can wipe out the debt. That’s particularly true for assets like vehicles, which decrease quickly and significantly in value.

It should be noted, however, that cramdowns can’t be used for recently purchased property. Typically, the asset must have been purchased more than a year ago. Vehicles must be at least two years old.

Cramdown is just one of many terms that people hear for the first time as they go through the bankruptcy process. The more you understand that process, the better your chances are of successfully completing it and emerging more financially stable than ever. That’s just one reason why having experienced legal guidance is valuable.