Bankruptcy Basics: What is a “cram-down”?

06 Jul Bankruptcy Basics: What is a “cram-down”?

So, you meet with an attorney to discuss your options in bankruptcy. The attorney discusses a chapter 13 and says that you can “cram-down” your car in a chapter 13 case. Cram what!? I like the thought of cramming something somewhere for a particular creditor but what exactly is a “cram-down”?

Under chapter 13, a debtor may “modify the rights of holders of secured claims. This means we can change the terms of the contract, that is, “modify” the deal between you and the creditor (typically a car creditor) in your chapter 13 bankruptcy case.

For example, as we all know, as soon as you drive a new car off the lot, it loses quite a bit of value. See here. So, unless you put a big down paymenton a car, as soon as you drive off the lot, you are now “upside down” on the car. That is, you owe more on the car than what it is worth.

According to the papersyou signed, you agreed to pay the entire debt and it really does not matter that the car is worth less than what you owe. That is why, outside of bankruptcy, if a car is repossessed andthe car issold at an auction,there oftenstill is a substantial amount of money owing on the contract or “note” (which is an “I promise to pay . . . “).

In a chapter 13 bankruptcy case, we are going to split the car creditor’s claim into two different components. We will first determine the value of the car through standard value guides and call that a “secured claim.” Then, if the value of the car is less than what is owed, the remaining difference between what is owed and the value of the car will be called an “unsecured claim.” We call this process “bifurcation” because we aredividing the claim into two separate components.

So how does this work? Suppose you have a 2008 Chevy Blazer that is worth $14,000.00 but you owe $18,567.00 to the car creditor. Instead of paying the entire $18,567.00 through your chapter 13 case, you will pay $14,000 at the district interest rate (called the Till rate after a U.S. Supreme Court opinion) over the life of your plan. The remaining $4,567.00 will be classified as an unsecured claim and will be paid pennies on the dollar (typically). The creditor is onlygetting $14,000plus interest atthe Till rate which represents the value of the car whilegetting only get a very small percentage of the remaining amount owed, that is, the $4,567.00. Thus, a “cram-down”!

It must be stressed that a “cram-down” is limited. If you are attempting to cram-down a motor vehicle, you must have owned the vehicle for at least 910 (approximately 2 and 1/2 years) before you can cram it down (if it financed the purchase of the vehicle). Also, it does not apply to real estate that you use as your primary residence.

Oftentimes, a cram-down may mean the difference between a successful reorganization or plan failure.Understanding what a “cram-down” is will help to understand what your bankruptcy attorney is trying to accomplish in your chapter 13 case.

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Adrian Lapas, Esq.

I've been practicing bankruptcy law in North Carolina since 1993, and am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar.
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