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What’s A “Cramdown” And How Does It Work?

Charlotte Bankruptcy attorney Bryan W. Stone answers the question: “Do I need an attorney to file bankruptcy?”

 

If you are considering filing for a Chapter 13 bankruptcy you might have heard the term “cramdown” bandied about and may be understandably curious about what it could refer to. Keep reading to find out what cramdowns are and how they work.

 

Sticky Note Question Mark Charlotte Chapter 13 Lawyer North Carolina Bankruptcy AttorneyWhat is a cramdown?

 

Cramdown refers to the act of reducing the principal balance of a debt to reflect the actual value of the underlying property. For example, a car that you owe $15,000 on may actually only be worth $10,000. By using a cramdown, you can have the debt decreased to the value of the property, saving you substantial amounts on certain items.

 

How does a cramdown work?

 

Cramdowns work by reducing the debt you owe to reflect the value of the underlying secured property. So what happens to the difference between what you owe and its value? Does it disappear? Not exactly. When a debt is crammed down, the balance then becomes an unsecured debt and is lumped in with your other unsecured debts, including credit cards and medical bills. In a Chapter 13 bankruptcy, the payment plan usually directs the lion’s share of money toward your secured debts, leaving little to go to the less important unsecured debts. This means you will usually only end up paying a small amount of this portion and the remainder will be discharged at the end of your Chapter 13.

 

What debts can be crammed down?

 

Though a cramdown sounds like a wonderful thing, it’s important to note there are limits on how it can be used. For one thing, cramdowns cannot be used against your personal residence. Cramdowns can be used for things like cars, investment properties and other items of personal property encumbered by loans (such as furniture or other household items).

 

Limits on cramdowns

 

Because cramdowns can be so good at reducing a person’s debt levels, Congress has of course placed limits on how easily they can be used. One restriction that applies to cramming down a car loan says that you must have bought the vehicle at least 910 days (or around 2.5 years) before filing for bankruptcy. This rule is meant to ensure that people don’t rush out and buy a shiny new car just before filing for bankruptcy and then walk away from a large amount of debt by cramming down the principal.

 

Another similar rule applies to other items of personal property and says that you must have owned the items for at least a year before the bankruptcy was filed. Given the typically smaller value of these items, the waiting period is substantially reduced.

 

If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC today at (704) 370-2828 or find more resources here. As professionals who are experienced in the bankruptcy arena, our attorneys will provide you with the best advice for your particular situation.

 

 

About The Author: 

Bryan 1  Bryan Stone is a Partner with Arnold & Smith, PLLC where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord tenant issues.  Originally from Macon Georgia, Mr. Stone attended the University of Georgia for a BBA in Banking and Finance and went on to Wake Forest to earn his law degree.  After law school Mr. Stone relocated to Charlotte where he has become quite involved in many local organizations.  He is currently the Chair of “Bravo!” the young professionals organization of Opera Carolina, he also founded the UGA Alumni Association of Charlotte.  In his spare time he enjoys perfecting his BBQ skills for the annual “Q-City BBQ Championships” and playing softball with the Mecklenburg County Bar Softball League.

 

 

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