If the state means test requires you to file for Chapter 13 bankruptcy, you still have to pay back certain debts, but at a reduced amount over a set number of years. That means it’s in your best interest to find ways for keeping those payments lower so you come out financially stable when the process is complete. A cramdown is a useful tool for keeping your head above water financially during bankruptcy while saving assets like your primary vehicle.
How Chapter 13 Debt Cramdowns Work
A cramdown occurs when the court allows you to lower the repayment cost of a loan to the current value of the collateral, rather than the amount owed. Cramming down only applies to secured debts that can be repossessed if you default, which typically includes your car but could also factor into payments for debts on furniture or property.
This tool available during Chapter 13 is often utilized to drop the amount you owe on a vehicle to its depreciated value. In a situation where a debtor still owes $12,000 on a truck, but it is only worth $5,000 because of age and needed repairs, the secured debt could be lowered to $5,000 that would then be repaid over three to five years.
Lower interest rates and smaller payments can be a huge boon during a Chapter 13 bankruptcy. Some restrictions exist, however, to prevent people from accruing debts and then declaring bankruptcy to pay less money. You can only cramdown loans when:
- 365 days have passed since buying personal property like household goods
- 910 days have passed since purchasing a vehicle
A cramdown doesn’t always work in all situations. The five-year payback requirement for instance may prevent you from paying off investment property loans, even at a reduced rate. Crucially, this tool isn’t available in many circumstances for the first mortgage on your primary residence, so it typically doesn’t help with your home payment unless you have multiple mortgages. There may be other methods to protect your home that should be discussed with an attorney when considering bankruptcy, however.
Consult an Attorney Before Declaring Bankruptcy in New York
Chapter 13 can be a complex and frustrating process without the right assistance. You should talk to an experienced bankruptcy lawyer to find out what assets could qualify for a cramdown. Get in touch with Alatsas Law Firm today to schedule an appointment.