If you’re financially struggling, declaring bankruptcy may be your path to debt relief. Bankruptcies are known to be effective in addressing financial problems, and the different types of bankruptcy in the bankruptcy code ensure that there is a bankruptcy chapter that specifically suits your financial circumstances. For instance, if it’s your wish to continue debt payments after filing bankruptcy on the condition that you be able to keep most of your assets, Chapter 13 (reorganization) is probably the filing chapter for you.
Filing a personal bankruptcy petition under Chapter 13 leads to several benefits, one of them is the option to do a “cramdown.” If you declare bankruptcy under this chapter, you may “cram down” certain debts. Chapter 13 filers can reduce the owed balance of a debt to the value of its attached property. Which debts qualify? The ones with a security interest paid to the lender, who may also repossess the asset if the debtor doesn’t make debt payments.
So, if you owe $20,000 in car loan on a vehicle that’s only worth $12,000, you can have it sorted into two types of debt when you file for bankruptcy. The value of the car is categorized as the secured part of the debt, and the remainder is regarded as non-priority unsecured debt. In Chapter 13 bankruptcy cases, the bankruptcy process does not guarantee the payment of these non-priority unsecured debts. They usually end up unpaid or just partially paid because, once you’re done carrying out the repayment plan, the secured portion of your car loan included, you’re no longer obliged to pay off the unsecured part.
Chapter 13 cramdowns aren’t limited to car loans. They can be applied to any other similar secured debt like an investment home mortgage and or a loan involving furniture or valuable personal items. As a rule, primary residence mortgages may not be crammed down, but they can be allowed if certain requirements are met.
How Do Cramdowns Benefit Debtors?
When a loan is crammed down, this means smaller monthly payments for two possible reasons:
- A longer duration in which you can pay off the loan since a Chapter 13 bankruptcy case may last from three to five years.
- Intervention from the bankruptcy court, ordering a reduction of the loan’s interest rate.
What Limitations Are There?
There understandably are requirements and restrictions involved in cramdowns. Federal bankruptcy law prevents people from cramming down loans on recent purchases. Here are a couple of the general rules:
- Car loan – Purchase should have been done at least 910 days before a Chapter 13 bankruptcy filing. This is to stop an unfair situation for lenders involving people buying a pricey car right before filing bankruptcy with the purpose of lowering payments with a cramdown of the loan.
- Personal property loan – Federal bankruptcy laws dictate that furniture and other household or personal items attached to a loan should have been bought at least one year before filing for bankruptcy for the loan to be eligible for a cramdown.
Why Hold back on Cramming down a Mortgage?
Investment property mortgages present a special situation. Since they usually involve a huge amount, it’s likely that the loan won’t be paid in full even after five years of bankruptcy proceedings. Unable to pay off even the crammed down value of the mortgage, debtors typically face a balloon payment as they approach the end of their payment plan. This situation is definitely not desirable for someone in financial distress. If you owe a mortgage, it’s recommended that you find a different route from a cramdown.
Considering a Loan Cramdown? Consult a West Virginia Bankruptcy Attorney Today!
Going bankrupt is difficult for your pride. Fortunately, there are ways for you to repay your creditors after you file bankruptcy. Talk to a bankruptcy lawyer to find out what options you have concerning this. A cramdown may be one of the solutions.
Bankruptcy lawyers can assist those who are considering filing so that they may strategize to get the best result from their bankruptcy filing. Guidance is paramount during this trying time, so make sure you get legal help. Call us at Thomas E. McIntire and Associates, L.C. to speak with one of our experienced West Virginia bankruptcy attorneys.