After practicing bankruptcy in Boston for over 25 years, we often get asked questions about Chapter 13 bankruptcy. We focus mostly on Boston Chapter 7 bankruptcy cases. One important advantage of the Massachusetts Chapter 13 bankruptcy is that it offers you the chance to bring down the amount that you owe to your creditors. When you lower the secured debts that you owe it is called a cram down.
The typical feature of a secured debt is that if you are not able to repay the debts, you have to return that item to the person or entity that holds the security interest. For instance, if you are not able to repay the mortgage loans that you have taken to purchase a house, furniture or a car, you have to return that asset to your lender. It is to be noted that cram down option is not applicable to a house. When you take out loans to purchase a car or furniture, you are required to make a number of monthly payments in order to pay the principal and interest. Sometimes, it may take years to repay the loans. However, the value of the asset which you are financing continues to depreciate. In fact, the value of the underlying asset often depreciates faster than the loan is being repaid.
Suppose you purchased a car two years ago. The current price of that car may be around $10,000, but the amount that you still owe on the loan may be around $12,000. This phenomenon is known as “upside down.” Withina few years after you make a real purchase, the value of that item depreciates to such a level that its current value falls short of the remaining balance that you owe on the loan that took to purchase that item. Chapter 13 bankruptcy has the provision to cram down these types of debts. Under the provision of Chapter 13 bankruptcy, you will be required to pay the amount which is equal to the value of the property and the interest on the remaining balance.
Cram down in bankruptcy is a court mandated way to lower down a part of your original contractual debt obligations. Here the court replaces the original contractual value of the property with its current market value. A cram down is an excellent financial tool which is used to curb your secured debts, especially with respect to Chapter 13 bankruptcy plan.
In order to get the benefits of a cram down, some time must have elapsed since the filing of the bankruptcy. This time period is not fixed for all asset classes, but varies with the nature of the asset class. In order to cram down a car, you must own the car for a minimum of 910 days since you filed for bankruptcy. All Chapter 13 cases go through the Massachusetts bankruptcy court, where the US Trustee appoints an interim trustee to supervise the case during this time.
After 910 days, you can replace the original outstanding balance of the car loan with the currently value of the car. Various items that can be crammed down include jewelry, furniture and appliances. In order to get the benefit of cram down, you must own these items for a minimum of 1 year after filing for bankruptcy.
Blog guest author Sam is a Community Member of Oak View Law Group Community and has made contributions through various articles written on subjects related to bankruptcy and consumer law.