Submitted by Jeff Bursell on
There are many hidden benefits to filing a chapter 13. One of the benefits that can really make a chapter 13 a beneficial option is the cram down. A cramdown is a way to pay for the value of a vehicle ONLY. A debtor does not have to pay the entire loan, but just the actual value.
Cramdown Definition
A cramdown is defined as:
A cramdown is the imposition of a bankruptcy reorganization plan by a court despite any objections by certain classes of creditors. Utilized as part of a chapter 13 filing and involves
the debtor changing the terms of a contract with a creditor. The provision reduces the amount owed to the creditor to reflect the fair market value of the collateral that was used to
secure the original debt. The term “cramdown” comes from the idea that the loan changes are “crammed down” creditors’ throats.1
In real-life terms, we split the amount owed into a secured portion and an unsecured portion. Therefore, a debtor pays the value of the assets, plus interest. The creditor gets paid 100%
of the value, plus interest. The remaining part of the loan only gets paid a small portion of the debt – as a general unsecured debt.
Real-Life Example
The best way to understand the power of the cramdown is to see the numbers in a simple example:
Debt Payments – No chapter 13
Total credit card debt: $20,000
– Monthly payment: $600
Car loan at 8% interest: $15,000
– Monthly payment: $305
Monthly debt payment: $905
Debt Payments – in a chapter 13
Total credit card debt: $20,000 + $5,000
– Unsecured part of car loan: $5,000
Actual car value: $10,000
– interest rate: 4.25%
Monthly debt payment: $281
Benefits of the chapter 13
In this example, a debtor filing a chapter 13, will have paid off all his or her debt in 5 years and owns the car free and clear. The important part is that the debtor would save a whopping $37,440 by filing a chapter 13 and cramming down the car to its actual fair market value.
Bankruptcy law has many benefits – cramming down a vehicle is just one.
1 See https://www.investopedia.com/terms/c/cramdown.asp
