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What Is A "Cram Down" In A Chapter 13 Bankruptcy Case?

Investors and consumers alike who are considering bankruptcy must familiarize themselves with the concept of a "cram down" under the Bankruptcy Code. § 1322(b)(1) of Title 11 states that a Chapter 13 repayment plan “ may modify the right of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence…” Thus, a chapter 13 plan that crams down a secured claim modifies the debt's contract and creates new payment provisions, such as the interest rate and term of the loan despite any objection of the secured creditor.

A Chapter 13 bankruptcy debtor may cram down an automobile loan, investment property mortgages, or other loans for items of personal property such as household goods, electronics, and furniture. However, as specifically stated in § 1322 of the Bankruptcy Code, a chapter 13 debtor may not cram down a mortgage on a principal place of residence.

The term “cram down” was first used to describe the ability of a court to “cram down” a plan over the objection of creditors in New England Coal & Coke Co. v. Rutland R. Co., 143 F.2d 179, 189 n.36 (2d Cir. 1944). Provided that the present value of the future stream of payments in the chapter 13 plan pays the secured claim in full, the cram down provisions of the Bankruptcy Code are satisfied, and the bankruptcy court will confirm the debtor's Chapter 13 plan over any objection by the creditor holding the secured claim.

Automobile and Personal Property Loans

Typically, cram downs of auto loans are most common in a Chapter 13 plan. However, there is an important requirement: To cram down a car loan, it must have been purchased at least 910 days, or almost 2 1/2 years, prior to the filing of the bankruptcy case. The underlying public policy of this law is to prevent people from buying a new car and cramming down the loan immediately after purchase.

Similar to the 910-day rule for cars is the one-year rule which applies to all other personal property. It requires that personal property such as household goods and furnishings be purchased at least one year prior to the bankruptcy filing to qualify for a cram down.

Here is how a "cram down" works, using an automobile loan as an example. If a car is worth $8,000 and is collateral for a loan with a balance of $20,000, then a debtor may cram down the loan to $8,000 in a Chapter 13 repayment plan as long as the car was purchased more than 910 days before the case filing. The remaining $12,000 of the balance of the loan will be included with other unsecured debts. The ultimate result will be that only a portion, if any, of this unsecured debt, will be paid in the Chapter 13 plan, and the remainder will be discharged at the plan's completion. More importantly, the automobile will be owned free and clear at the end of the bankruptcy.

Investment Property Mortgages

These types of mortgages are crammed down just as auto and personal property loans but without the 910 and 365-day requirements. However, because the length of a Chapter 13 plan may be no more than five years, it requires the debtor to repay what may a substantially high payment amount in a limited period of time, which may be very difficult for most Chapter 13 debtors.

Cram downs require the knowledge of specific details of a secured claim and the application of applicable bankruptcy law. The attorneys at Loan Lawyers may help any potential debtor accurately make this analysis. The experienced South Florida defense attorneys at Loan Lawyers are here to help you if you are considering bankruptcy. To schedule a free consultation at any of our three conveniently located offices, contact Loan Lawyers today by calling (888) FIGHT-13 (344-4813).