Bankruptcy Cramdowns Chapter 13: What is it?
In a Chapter 13 bankruptcy case, a “cramdown” enables you to reduce the principal balance of your debt to the value of the collateral secured. You may be able to keep your car, real estate investment, or other properties by using a Chapter 13 cramdown.
If you want to know when and how to use Oklahoma bankruptcy cramdowns, Scott Harris Law, PLLC can provide legal information when you schedule a free consultation to discuss your case.
When filing for bankruptcy in Oklahoma City, Scott Harris Law is the company to trust. Together, we will figure out what you want to accomplish and how to solve your serious debt problems quickly. Give us a call now to book an appointment!
Chapter 13 Bankruptcy: A Quick Overview
People generally prefer filing Chapter 13 bankruptcy because they earn too much income to pass the Chapter 7 means test, do not want to lose their home or car after having fallen behind on their monthly payment, or want to avoid wage garnishments as well as other collection strategies while repaying support arrearages or recent tax debt over five years.
Other benefits not available under Chapter 7 include “lien stripping,” which eliminates junior mortgages on a residence, and mortgage cramdown, which lower monthly payments on car loans.
Do I Qualify for Chapter 13 Bankruptcy?
The following steps involve learning if you are qualified, how much you will pay, and what problems you may experience throughout your Chapter 13 plan.
- Debt ceilings. You can only have so much debt in Chapter 13 bankruptcy. Find out the Chapter 13 bankruptcy debt limits here. You will be disqualified if your overall debt load is too high, but you may file an individual Chapter 11 bankruptcy instead.
- Minimum income required: When filing for Chapter 13 bankruptcy, you must demonstrate that you can afford to pay your monthly household expenses and the monthly plan payment. If you do not have any income or it is too small, the bankruptcy court will not “confirm” or accept your planned Chapter 13 plan.
- Person status: A Chapter 13 debt discharge is offered only to individuals and sole proprietors. It is not open to small businesses or companies. On the other hand, small company owners who file individually will include personally guaranteed business debts in the Chapter 13 plan. In addition, a company owner’s improved financial situation can indirectly help a small business, which makes Chapter 13 worth considering.
How Much Will I Pay in a Chapter 13 Plan?
The Chapter 13 payment rules are as follows: to calculate your monthly payment, add all debt you need to pay and divide the amount by 36 or 60—the number of months in your repayment plan term.
- Priority debt: Your Chapter 13 plan must fully pay all “priority claims” including alimony arrearages, child support, and latest tax obligations.
- Secured debt: Secured debt is debt backed by collateral, like your house or car. You need to pay secured debt payments and arrearages to keep your property.
- Unsecured debt: This category includes any outstanding debts. Your disposable income—the amount left over after paying secured debt, priority debt, and allowable living expenses—must be applied to unsecured debt, like balances on credit cards and medical bills.
- Trustee fee: You must pay an extra 10% to compensate the bankruptcy trustee. Find out about the trustee’s fee and how it can make your payment much higher with the help of a bankruptcy lawyer.
Am I Eligible for Oklahoma Bankruptcy Cramdowns or Lien Stripping Under a Chapter 13 Bankruptcy?
Anyone struggling with heavy debt will want to understand their options for reducing or eliminating their debt. Because it can be completed quickly and allows an individual’s unsecured debt (such as credit card debt) to be discharged, Chapter 7 bankruptcy is generally the best choice for people who do not own substantial assets.
However, those with secured debt (like a house or car loan) or major assets may need to file for Chapter 13 bankruptcy. A debtor in these circumstances may be able to reduce their debts using methods defined as “cramdowns” and “lien stripping.”
What are the Cramdowns in Chapter 13 Bankruptcy?
Some secured debts can be crammed down. Debts are considered “secured” when the creditor has a claim on your property and the right to repossess once you stop making payments. Your car and home loan are two typical examples of secured debt. Investment property loans, car loans, or any non-real estate property loans (e.g., household items and furnishings) can be crammed down under a Chapter 13 bankruptcy. However, you cannot cram down a loan on your primary residence.
How Can I Cram Down My Loans in My Chapter 13 Case?
Since many people use a Chapter 13 bankruptcy in cramming down a car loan, we will use a car loan cramdown here to show how cramdowns work.
For instance, if you are the owner of a $5,000 car but your car loan debt is $10,000, you can use your Chapter 13 repayment plan to cram down your loan amount to $5,000 (which is the value of your car). The leftover $5,000 balance will be added to your other unsecured debt (i.e., credit card debt).
This means you will probably pay a fraction of your unsecured debt, while the rest will be wiped off at the end of your Chapter 13 plan. This means you will have full ownership of the car after the bankruptcy.
What are the Other Benefits of Oklahoma Bankruptcy Cramdowns?
To reduce your monthly obligations, you may be able to cut your interest rate and spread your payments over a longer duration by cramming down your debts via a Chapter 13 bankruptcy. The interest rate you pay to a secured creditor under your Chapter 13 plan is decided by the bankruptcy court and is lesser than your note rate. Furthermore, since Chapter 13 plans often run for three to five years, you might be able to extend the payment period of your crammed-down loan, resulting in smaller monthly payments if you paid the loan outside of bankruptcy.
What are the Restrictions in Chapter 13 Bankruptcy Cramdowns?
To prevent consumers from abusing cramdowns to get rid of their most recent purchases, Congress has imposed specific restrictions on when they can be used. These restrictions are determined by the type of property used to secure the debt you want to be crammed down.
The 910-Day Rule
If you want to cram down your car loan debt, your vehicle must have been acquired in at least 910 days (approximately 2.5 years) before filing for bankruptcy. This discourages consumers from purchasing a new car, only to cram down their loan as soon as they drive off from the showroom. Lenders would suffer as a consequence of this.
The One-Year Rule
This policy is similar to the 910-day rule for cars, except it extends to all kinds of personal property. It is often relevant if you are trying to cram down loans on home items, and it requires that the items be acquired at least one year before the bankruptcy before a cramdown is permitted.
Mortgages for Investment Properties
Most courts require that crammed-down loans be paid during the three- to five-year period of your Chapter 13 plan. Most people who want to cram down their investment property mortgages face a practical problem because they do not have the resources to pay off a mortgage (even a crammed-down mortgage) in this short of a time frame.
Talk With Our Oklahoma Bankruptcy Attorney!
Chapter 13 bankruptcy cases are challenging to navigate. Although it is possible to file a Chapter 13 case on your own, it is seldom successful, and most courts advise filers to hire a bankruptcy attorney specializing in Chapter 13. We at Scott Harris Law know how stressful bankruptcy can be. The difficulty of bankruptcy extends to figuring out which chapter is appropriate for you.
Scott Harris Law has assisted thousands of Oklahoma residents in obtaining debt relief since 2009. We have been helping people file for bankruptcy, defend themselves against foreclosure, and negotiate their debts for over a decade. Our legal team is here to assist and explain everything you need to know about Oklahoma bankruptcy cramdowns whenever you need them. Don’t procrastinate any longer if you want debt relief. Call us now to book an appointment for a FREE CONSULTATION!