What Is a Cramdown? How Do You Qualify?
When you need protection under American bankruptcy laws but don’t qualify to discharge debts under Chapter 7, you still can secure significant benefits with a Chapter 13 reorganization. In addition to obtaining the protection of the automatic stay, which prohibits creditors from calling, writing, or taking any legal action to collect the debt, you also can employ what is known as a “cramdown.”
What Is a Cramdown?
In essence, a cramdown lets you reduce the principal balance of any secured debt to the fair market value of its collateral. Any amount over the fair market value is considered unsecured debt and treated accordingly. As a general rule, a cramdown is most effective when the loan is “under water,” i.e., when the principal amount due exceeds the fair market value. With a cramdown, you can pay off the reduced principal balance over the life of your Chapter 13 proceeding.
A cramdown lets you keep non-exempt property while simultaneously reducing the financial impact. Furthermore, when the bankruptcy proceeding ends, you own the property free and clear. In many instances, in addition to a reduced principal balance, you can negotiate a lower interest rate or extend the term of the loan.
Limitations on Cramdowns
There are two requirements to qualify for certain types of cram downs:
- For motor vehicles, you must have made the purchase at least 910 days before the filing of your bankruptcy petition.
- For all other personal property, you must have made the purchase at least one year before the filing date.
Contact Attorney Howard N. Sobel
At the office of Howard N. Sobel, we provide comprehensive counsel to individuals throughout the state of New Jersey who seek to address financial challenges through a bankruptcy petition. Contact our office online or call us at 856-424-6400 to see if you qualify for a free initial consultation (on selected cases). Evening and weekend appointments can be arranged upon request. We accept all major credit cards.
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