San Diego Bankruptcy: Cram Down
Whereas a lien-strip applies to real property, a “cram down” is a similar process, mostly applied to automobiles.
Assume you bought a car three years ago. Its sticker-price was $14,000. You may have traded in your old car or put down $2000 cash or so, but regardless, you had to finance the rest. Now you are about to file for bankruptcy; the car is worth $7000 but you still owe $12,500.
Well, in a Chapter 7, you have only two options: turn in the car and discharge the outstanding debt, or keep the car and reaffirm the debt on the original terms and conditions.
In a Chapter 13, a third option presents itself. If you want to keep your car, you (probably through your lawyer) can motion the court to reclassify the debt as partly secured and partly unsecured. In the example above, that means that the court could essentially force the lender to accept a new loan with a principal of $7000 (plus interest, of course) while declaring that the difference between the new loan and the old loan (which is $12,500 minus $7000 equals $5500) is then unsecured and treated like credit card or medical debt. Very often this means pennies on the dollar, or even absolutely nothing, for the lender. At the end of the planned payment period, any outstanding debt is then discharged. The term “cram down” is therefore apropos in light of the court’s ability to force the lender to accept this reclassification. The lender simply has no choice.
The only caveat is that, after the overhaul to the bankruptcy code was enacted in 2005, the above example requires that the car loan at issue be at least 910 days old. That’s two and a half years. The 910-day waiting period also does not apply to vehicles not used as a “personal automobile.” If your car is your personal automobile or the loan is newer than two and a half years, the entirety of the loan is treated as secure under the Chapter 13 payment plan, meaning all of it will have to be paid.
Assume you bought a car three years ago. Its sticker-price was $14,000. You may have traded in your old car or put down $2000 cash or so, but regardless, you had to finance the rest. Now you are about to file for bankruptcy; the car is worth $7000 but you still owe $12,500.
Well, in a Chapter 7, you have only two options: turn in the car and discharge the outstanding debt, or keep the car and reaffirm the debt on the original terms and conditions.
In a Chapter 13, a third option presents itself. If you want to keep your car, you (probably through your lawyer) can motion the court to reclassify the debt as partly secured and partly unsecured. In the example above, that means that the court could essentially force the lender to accept a new loan with a principal of $7000 (plus interest, of course) while declaring that the difference between the new loan and the old loan (which is $12,500 minus $7000 equals $5500) is then unsecured and treated like credit card or medical debt. Very often this means pennies on the dollar, or even absolutely nothing, for the lender. At the end of the planned payment period, any outstanding debt is then discharged. The term “cram down” is therefore apropos in light of the court’s ability to force the lender to accept this reclassification. The lender simply has no choice.
The only caveat is that, after the overhaul to the bankruptcy code was enacted in 2005, the above example requires that the car loan at issue be at least 910 days old. That’s two and a half years. The 910-day waiting period also does not apply to vehicles not used as a “personal automobile.” If your car is your personal automobile or the loan is newer than two and a half years, the entirety of the loan is treated as secure under the Chapter 13 payment plan, meaning all of it will have to be paid.
