Cram Downs

A chapter 7 bankruptcy generally involves a situation where you keep your assets, you get your unsecured bills totally wiped out, and if you have a house with a mortgage or a car with a loan, you keep them as long as you make the regular payments.

Some people have a special situation in which they cannot only receive the benefits of a chapter 7, but they can also receive additional benefits of a chapter 13. This relates to reducing your car payments. There is one catch. A new law took effect on October 17, 2005, which restricts your right to reduce your car payments.

Chapter 13 permits something called a cram-down. The easiest way to explain it is by way of example. Let's say you have a car that is worth $7,000 replacement value but your payoff figure to the finance company is $10,000. In this situation, the bankruptcy court does not feel it is fair that you should have to pay $10,000 for a car that is worth only $7,000. Therefore, you can petition the court to reduce the debt to $7,000. In other words you can reduce your monthly car payments, keep the car, and still have your other debts wiped out.

Here is the catch - you must own the car for at least 30 months before you can do the cram down. The previous law did not restrict the time on car ownership - in other words you could have reduced your car payments even if you bought the car a month ago. Now the law is tougher, and you need to own the car for at least 2 ½ years (910 days) before you can cram it down.

With regard to the value of cars, there are monthly books published which give you the car value. Your car value can be lowered if it has high mileage, if it has damage to the body, mechanical problems, or other problems. The less your car is worth, the more money you will save. Therefore, please let us know of any problems you have with your car if you choose to do a cram-down because it is to your advantage to have the value of the vehicle as low as possible.

For example, if you owe $10,000 on your car and the replacement value is $7000, you can normally reduce your car loan debt to $7,000 and substantially reduce your car payments. If your car has damage, however, or needs repairs, or has excess mileage, or other problems, this could reduce the value below the $7,000 book value and maybe the car is only worth $5,000.00. Therefore, in this example, you only have to pay $5,000 as the cram down value of the vehicle.

This may sound complicated - ask us any questions to see if cram-down applies to you. Interest is required on a cram-down. The GREAT NEWS is that the law was changed by the United States Supreme Court in May, 2004. Now, the interest rate you pay on a cram down is only about 7.5% or a little more in many cases, even if your contract rate of interest is much higher.

Keep in mind that the finance company does have the right to object to a cram-down. If, however, the cram-down figure is based on the replacement value of the car, you have an absolute right to a cram-down in a chapter 13 bankruptcy and to reduce your interest rate to about 7% or 8%.

There are also times when you can cram down the mortgage on your home. It can only be accomplished in limited circumstances. Whether you can cram down a mortgage on your primary residence depends on several factors. We need to see a copy of your mortgage documents before we can advise you whether or not a cram down is possible on your mortgage.

Cram downs are also permitted on other items of personal property. For example if you have financed a swimming pool, a vacuum cleaner, or other items of personal property, you may normally cram down such an item as long as the item is reasonably necessary to the successful completion of your bankruptcy.

If we believe that you qualify for a cram down, we will explore the various options and alternatives that you have available to you. It is a great way to legally save money through the bankruptcy procedure.