In a Chapter 13 bankruptcy, secured debts, like a car loan can sometimes be modified through a Chapter 13 repayment plan. If you are upside-down on certain secured loans, meaning you owe more than the property is worth, you may be able to reduce the principal balance of your loan by way of “cramdown.” Cramdown can be a very beneficial tool in Chapter 13 bankruptcy because many individuals are upside-down on secured property. A cramdown in a Chapter 13 bankruptcy allows you to reduce the principal balance of a debt (cram it down) to the fair market value of the property. In a Chapter 13 you can cram down your car loan, investment property mortgages, or other personal property loans such as household goods and furnishings. However, you cannot cram down a mortgage on your principal place of residence.
By cramming down a loan in Chapter 13 bankruptcy it may allow you to reduce the interest rate and stretch out your payments over a longer term in order to lower your monthly obligations. During the cramdown the debtor converts a portion of the debt from secured to unsecured status. For example, a $10,000.00 loan on a vehicle that has a fair market value of $5,000.00 may be crammed down to a secured debt of $5,000.00 and $5,000.00 will be converted to unsecured debt. However, there are certain restrictions Congress has placed on when a debtor can utilize cramdown in bankruptcy.
First, if you want to cramdown a car loan, you must have purchased the car at least 910 days prior to the bankruptcy. Second, if you want to cramdown on loan on personal property, the household goods must have been purchased at least one year prior to filing for bankruptcy. Third, if you want to cram down an investment property mortgage, most courts require that the loan that is crammed down be paid off within the three or five year length of your Chapter 13 plan.