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.

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Did you receive a notice of garnishment of your wages? Bankruptcy can stop it and get some of your money back that has already been taken!

Many of my clients come to me with wage garnishments already in place or they have received notice that one is about to begin.  A wage garnishment is when a creditor can reach out to your employer and seize part of your paycheck for some debt you owe.  These creditors are limited to taking no more than 25% of your take-home pay.  This amount can be large though and can make the difference in whether you can afford to pay your bills or not.

Before creditors can get this garnishment in California they must go to court and get a judgment and then file for the wage garnishment with your employer.  Once they get it the garnishment will continue until the debt is paid in full which can be some time if the debt is large.

Some of my clients have a $20,000 or $30,000 credit card debt or vehicle deficiency debt that is being garnished from their wages.  Most of these people can’t afford to pay their ongoing bills with their current income and a 20% pay cut makes their situation impossible.

It is best to catch this before the garnishment hits your paycheck but the good news is that bankruptcy can stop this immediately from happening.  If we catch the garnishment before it starts that is best.  But if we do not we can still stop it and wipe out the underlying debt.  We can even get back some or all of your money garnished if we file within 90 days of the garnishment beginning.  We will send a request to the creditor that they return the money and most will return it if a bankruptcy case has been filed.

So don’t despair if you receive a garnishment notice.  It is not the end of the world.  A wage garnishment can be stopped and the money can usually be returned.  You just need to call a bankruptcy attorney, let the attorney analyze your case, and file the bankruptcy.  And don’t worry about whether you owe the money or not and don’t worry about not paying it back.  It’s your federal right to file for bankruptcy and get a fresh start with your debts discharged so contact an attorney today and begin the process to return your income to you.

I am a bankruptcy lawyer practicing bankruptcy law in San Diego, CA.  For more information please visit my website at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation at (619) 702-5015.  Call now for a free credit report and analysis!

If you are considering bankruptcy and want to receive the Free e-book; “13 Things You Should Do To Prepare For Filing Bankruptcy” then please e-mail me at: farquharesq@yahoo.com.

Will I pass the means test in bankruptcy but I have a spouse who makes good money but is not filing?

Good news!  That is okay!  Generally a non-filing spouse’s income is included in the bankruptcy means test as household income even if the spouse is not filing bankruptcy unless the spouses live apart.  But if your marriage is a recent marriage of less than six months then not all of the non-filing spouse’s income will be included in the household income calculation anyway.

If it is a marriage longer than six months then there is something called the marital adjustment which will allow you to reduce the amount of your spouse’s income that will appear on the means test.  The marital adjustment appears on line 17 of the means test form 22A.  There are several lines there but you can add an attachment as I did recently in a case.   This marital deduction allows you to deduct from your spouse’s income all of your spouse’s expenses that your spouse pays separately.

The first one is the deductions that come out of the non-filing spouse’s paycheck.  The non-filing spouse will have taxes, insurance, union dues and even a retirement deductions taken out of his or her paycheck.  The income for the spouse goes into the means test in the gross amount but the deductions are taken out here.  The retirement can be included here where it would not be for the filing spouse unless the filing spouse had a mandatory retirement.

Remember that this spouse is not filing bankruptcy and can spend money and take deductions as needed.  The non-filing spouse is not attempting to discharge their debts so the trustee has much less control over what they take on deductions than he or she would over a party that is filing for bankruptcy. But still the Trustee can challenge these marital deductions so it is good to have a bankruptcy attorney to analyze which ones can be justified.

The non-filing spouse can also take his or her credit card payments as marital deductions.  These payments will have to be made after the bankruptcy as they are not being discharged and thus they can be taken here.  If the non-filing spouse has a car of their own then they can take those car expenses there too if they have not already been taken in the car section of the means test.  The same would go for a separate cell phone.

There are other expenses too like separate student loan payments that the non-filing spouse can take.  Also if they have traveling or food expenses for themselves or if they pay child support for a child from a previous marriage then they can take those expenses.  Anything that is truly an expense just for them and was not paid on a regular basis for the household expenses for the debtor or the debtor’s dependants.

This gives you a lot of leeway for expenses to be included here that you or your attorney can come up with that meet this criteria.  Most people do have these expenses that are separate and distinct from the expenses that are contributed to the household.  This is because most people, even if married, these days have separate and distinct lives.  They may have many debts and obligations and expenses left over from before the marriage or just expenses that are truly just for them.

So don’t despair if you don’t pass the means test with your spouse’s income.  The marital deduction sections may make bankruptcy possible.  If it seems too complicated then contact a bankruptcy attorney who will help you decide which expenses can be taken on the marital deduction section of the bankruptcy means test.

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 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.