What is a “cramdown” in bankruptcy?

Bankruptcy is filled with interesting terms like the “cram-down”.  A cram-down is just where property that is encumbered with a loan is restructured in a chapter 13 bankruptcy so that the debtor only has to pay the loan to the extent of the property’s worth.  A cramdown can also be done in a chapter 11 bankruptcy.

A cramdown can be a very helpful and powerful tool in a bankruptcy if a debtor has property that he wants to keep but is upside down (meaning he owes more on it than it is worth).  With a cram-down a debtor can strip away the part of the loan that is unsecured and pay the secured part in the 5 year chapter 13 bankruptcy period.  The unsecured part is the upside down portion.  So if you have a car worth $10,000 but it has a $15,000 loan on it then the cramdown would strip off the $5000 unsecured portion of the loan and let you pay the $10,000 secured portion.

The loan is actually bifurcated or divided into two parts in a chapter 13 cramdown.  The secured part is paid in the plan.  The unsecured part drops in with the general unsecured debts.  These debts are paid only to the extent that any unsecureds are paid.  Sometimes it can be very low like 10% or 20%.  The rest (80% to 90%) is discharged at the end of 5 years.  The creditor is thus forced to “eat” the rest of his loan and the debtor does not pay it.

Keep in mind that this is usually done in a chapter 13 bankruptcy.  A chapter 13 is a pay back plan where debts are paid out over 3 to 5 years.  In the chapter 13 the unsecured portion of the loan will be paid out of disposable income by the debtor.

Disposable income is the amount the debtor has left after he pays his bills.  This can be as little as a few hundred dollars a month that goes to pay unsecureds.  This same cramdown tactic can be used for furniture, jewelry or any other personal property.

There are special rules for car cramdowns though.  You must have owned the car for 910 days (2 and one half years) before you are eligible for the cramdown.  For other personal property it is only one year.

Real estate can be crammed down too in a chapter 13.  If you have a piece of real property that is an investment property and not your residence then it too can be crammed down in a chapter 13.  If a property is worth $200,000 but has $350,000 mortgage on it then the $200,000 can be paid in the plan and the $150,00 can be paid at the low rate along with the other unsecureds.

The $150,000 then would be essentially stripped off and would go away if a workable plan is proposed and is paid on over the five-year period.  This is obviously a tremendous advantage to the debtor and a great disadvantage to the creditor.  But remember too with real estate the secured portion ($200,000 in the above example) must be paid over the 5 year period just like with a car or other personal property.  This is of of course difficult for most debtors as the monthly payments would be very high.

Cramdowns are also available in a chapter 11 just like in a chapter 13 upon approval of the reorganization plan by the court and the creditors.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.