How Does a Bankruptcy Cramdown Work?

After successfully completing your Chapter 13 bankruptcy repayment plan, the Kentucky bankruptcy court may grant a discharge on your unsecured debts. But you should know there is also a way to eliminate some of your secured debts from your immediate responsibility through this process. This may be done by petitioning for a bankruptcy cramdown. With that being said, please continue reading to learn how a bankruptcy cramdown works and how an experienced Louisville, Kentucky Chapter 13 bankruptcy lawyer at Schwartz Bankruptcy Law Center can help determine whether petitioning for one is in your best interest.

How does a Chapter 13 bankruptcy cramdown work?

First things first, a bankruptcy cramdown is generally defined as a way to reduce the principal balance of a secured debt to the value of the collateral it is secured by. That said, the most common types of secured debt eligible for such a cramdown include car loans, investment property mortgages (i.e., not the mortgage of your primary residence), and personal property (i.e., furniture, household appliances, and jewelry).

For example, let’s say you have an outstanding car loan of $20,000. However, say that the current value of your car is set at approximately $15,000. Well, if you are granted a cramdown, you may now only be expected to pay $15,000 through your three- to five-year Chapter 13 repayment plan. In turn, the remaining $5,000 balance may be lumped with the rest of your unsecured debts. Hopefully, most or all of these unsecured debts may be discharged at the conclusion of your bankruptcy proceedings. A bonus is that you may also exit your bankruptcy proceedings while having a car under your full ownership.

How do I know if I should petition for bankruptcy cramdown?

For one, you must confirm whether you are eligible to petition for a Chapter 13 bankruptcy cramdown in the first place. Going back to the car loan example, you must have purchased your car and taken out a loan at least 910 days (i.e., two years and six months) prior to your Chapter 13 bankruptcy filing date. Similarly, you must have obtained a personal property loan at least one year in advance.

In addition, say you are granted a cramdown for your investment property mortgage. Well, in this case, you must understand that the Kentucky bankruptcy court may expect you to pay off this crammed-down loan fully within your three- to five-year Chapter 13 repayment plan. Even with now paying a reduced amount each month, this may still be too quick of a turnaround time. This may be especially true if your original mortgage term was as long as 30 years and your now court-ordered repayment plan is as short as three years.

As a consumer considering your bankruptcy options, there is no one better you can turn to than a skilled Louisville, Kentucky consumer bankruptcy lawyer from our firm. So please, call us at Schwartz Bankruptcy Law Center as soon as possible.