Cram Downs In Bankruptcy

Bankruptcy is Sometimes Needed
No one likes to admit financial hardship. Many people put off the inevitable in their personal finances for as long as they can. Maybe they feel embarrassed; maybe they want to fight to the last breath. However, what many people do not realize is that admitting financial distress and taking steps to fix the problems of the past can be the most responsible and intelligent thing to do to get out of trouble. Below, I outline one such option available to those filing for Chapter 13 bankruptcy.

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Chapter 13 Bankruptcy and Your Car Loan
One of the most useful tools is bankruptcy is called the "cram down." This refers to the powers granted by 11 USC §506. This allows debtors using Chapter 13 bankruptcy, with a car loan, to pay the value of the car instead of the amount owing on the loan. For example, say you own a car that's worth $5,000 but have a loan of $8,000 on the car and an interest rate of 12% (because your credit is bad). If you bought the car for $12,000 and paid on it for a few years, your payment is likely $316.00. Through a cram down, you can propose to pay back only $5,000 (what the car is worth), extend the term for 60 months, and can lower the interest rate to a more reasonable rate (let's say 5%). These changes from the original contract are known as a "cram down."

Example of How a Cram Down Works to Decrease Monthly Payments
In our example, your payments would go from $316.00 per month to $95.00 per month. Even if you included all your attorneys fees in the plan, and lumped the required payments together, you would still likely be paying less than half of what your car payment was before your Chapter 13 filing. This option is particularly useful when you are experiencing monthly cash flow issues, perhaps because of a recent medical issue or because of a recent layoff.

Potential Cram Down Caveats in your Chapter 13 Bankruptcy
There are some limitations on the ability to use these remedies. First, the laws passed in 2005 added what has become known as "the hanging paragraph." This clause states that any loans that were incurred less than 910 days prior to the bankruptcy have to be paid in full and cannot be crammed down. Still, many times the interest rate and term can be adjusted, just not the amount of the loan.

Another limitation how your car is valued in the cram down. Most courts have rules as to how cars are valued. One common standard is the NADA retail value. This value is higher than the private party or trade-in value and helps to provide some protection to creditors.

Using a Lawyer
Bankruptcy attorneys can assist you in navigating the local rules and regulations in your area. They can assist you in your Chapter 13 filing to make sure it is accepted by the court and creditors. In many cases, using a lawyer can help you pay less in a Chapter 13 filing than if you had attempted to file Chapter 13 on your own as lawyers will help you be protected to the fullest extent of the law. Best of all, most attorneys also provide free consultations to help you evaluate your options.

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