The Morrison Law Group is a team of seasoned bankruptcy attorneys who have helped 8,000 Utah residents file bankruptcy and gain a fresh start. A recent blog introduced the concept of a “cram down.” § 1322(b)(1) of Title 11 (aka the Bankruptcy Code) permits debtors to modify or “cram down” the treatment of a claim, i.e., reduce how much is paid on the claim. Today’s blog explains how a cram down works in relation to specific types of property, such as automobiles.

Cram downs of motor vehicle loans in Chapter 13 plans are the most common use of the cram down tool. This type of cram down contains the requirement that the car subject of the crammed down claim must have been purchased at least 910 days (2 1/2 years) prior to the filing of the Chapter 13 bankruptcy case. This provision of the Bankruptcy Code prevents debtors from purchasing a new car and cramming down the loan immediately after engaging in the transaction.

A one-year time period applies to all other personal property, such as household goods and furnishings. These types of property must be purchased at least one year prior to the bankruptcy filing to be eligible for cram down treatment.

A “cram down” works as follows, using a motor vehicle loan as an example.

• A Chevrolet Corvette is purchased more than 910 days before the Chapter 13 bankruptcy case is filed;
• The car presently has a value of $11,000;
• The car is collateral for a claim with a balance due of $28,000.

In this situation, a debtor may modify or “cram down” the loan and pay the claim off for $11,000 in a Chapter 13 repayment plan. The remaining $17,000 of the balance of the loan will be included with the debtor’s unsecured debts. It will be treated the same as an unsecured credit card debt, which means most, if not all, of it will be discharged. The result is that loan balance of this creditor’s secured claim is significantly reduced, therefore, saving the debtor money.

Whatever portion, if any, of this $17,000 unsecured debt, would be paid in the Chapter 13 plan if general unsecured creditors are entitled to any estate bankruptcy funds. The remainder will be discharged, and the Corvette will be owned free and clear at the end of the Chapter 13 bankruptcy case.

The present value of the future stream of payments in the chapter 13 plan must pay the secured claim in full to satisfy the cram down provisions of the Bankruptcy Code. If this occurs, the bankruptcy court will confirm a Chapter 13 plan despite the objection of the creditor holding the secured claim.

As a side note, investment property mortgages may be crammed down without the 365 and 910 requirements. A caveat is that because the length of a Chapter 13 plan may not be longer than five years, a debtor may be required to repay a substantially high sum in a short amount of time.

Bankruptcy helps good Americans escape financial hardship and start over again. Call the Morrison Law Group at 801.456.9933 today to schedule a FREE consultation. We are Utah’s only statewide bankruptcy law firm and have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.