How Does a Cramdown Work in Chapter 13 Bankruptcy?

Find out how to reduce the principal and interest owed on financed property in Chapter 13 bankruptcy.

By , Attorney · University of the Pacific McGeorge School of Law

If you owe more than what your financed property is worth, a Chapter 13 bankruptcy might let you pay less by reducing the debt's principal balance and interest rate. In this article, you'll learn about a procedure called a "cramdown," and the rules that apply to real estate, your car, and other personal property (any property other than real estate).

Not sure whether you should file for Chapter 7 or Chapter 13 bankruptcy? Learn about the differences between bankruptcy types.

How a Chapter 13 Cramdown Works

Since cars begin to depreciate the moment you drive them off the lot, this is the most common example of using a cramdown. However, the same process applies to other types of loans eligible for a cramdown as well.

Suppose that you financed a car in 2015 for $20,000. In 2019, you owe $15,000, but the car is worth $10,000, leaving only $10,000 secured—the amount the creditor would get if it repossessed and sold the car. A cramdown can reduce your loan balance down to the $10,000 secured portion, or the "replacement value" of the vehicle—the amount it's worth.

With a cramdown, you'll pay only $10,000 instead of the $15,000 balance through your Chapter 13 repayment plan. And you'll own the car free and clear after the plan.

As an added benefit, you might be able to reduce your interest rate on the reduced balance. The bankruptcy court sets the interest rate and, depending on which district you live in, the rate will usually be lower than the original note rate.

How You'll Pay a Cramdown in Chapter 13

In the above example, the unsecured $5,000 loan balance gets reclassified as unsecured debt, which falls in the same category as credit cards and medical bills. These debts receive payment only after you pay:

  • monthly payments on secured debt, such as mortgage and car payments, and
  • the entire balance of priority debt, like recent tax obligations and domestic support arrearages.

General unsecured creditors divide any remaining funds on a pro rata basis. Typically, filers don't have enough funds to pay all unsecured debt, so creditors receive only a small portion of the balance owed in a Chapter 13 bankruptcy—but, on occasion, a high-income filer will have enough to pay all debts in full.

If you're like many filers, you'll pay less than $5,000 if anything at all. The unpaid portion will get discharged (wiped out) along with your other qualifying unsecured debt balances on completion of your bankruptcy plan.

Chapter 13 Cramdown Restrictions

A cramdown is available for every type of property loan, but the rules governing each type might prohibit you from benefiting in Chapter 13. For instance, you can cram down a:

  • car loan
  • other personal property loans, such as for furniture or household goods
  • and a real estate mortgage.

Find out about restrictions and limitations for each loan type, as discussed below.

Chapter 13 Vehicle Cramdown

This rule requires you must have purchased the vehicle and taken out the loan at least 910 days (approximately two and a half years) before filing the bankruptcy. So you cannot use a cramdown on a car you recently bought. An exception exists if you purchased the vehicle for your business.

Learn more about the 910-day rule in bankruptcy.

Chapter 13 Personal Property Cramdown

The personal property rule requires you to have purchased the item at least one year before your bankruptcy. This rule applies to all personal property loans other than car loans. The most common examples are furniture, household goods, or jewelry bought with in-store financing.

Chapter 13 Mortgage Cramdown

While timing restrictions don't exist for mortgages, you can't use a cramdown for your residence. You're limited to using it for mortgages on other types of real estate property such as rental homes and investment property.

This cramdown is rarely used because it is costly, and most filers don't have enough income to fund it. Why? Most courts require that the debtor pay off the balance of any crammed down loan in full in the three- or five-year Chapter 13 repayment plan—including cramdown mortgages. Given the short amount of time, few people can take advantage of a mortgage cramdown as a practical matter.

You can learn more about cramdowns on real estate loans in Reduce Investment or Rental Property Debt With a Bankruptcy Cramdown.

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