This is a two-part series on “cram down.” This first part provides an overview of the cram down option. The second part will discuss some built-in limitations to cram down.
Overview
“Cram down” is one of the most useful tools available under chapter 13. Cram down provides you with the right to reduce the amount you owe on secured debts on certain items of personal property. “Secured” debts are those where the creditor has the right to take back the property if you don’t make the payments.
When you cram down a secured loan, the balance owed is reduced down to the amount the property is actually worth on the day your chapter 13 plan becomes effective. You will no longer be obligated to pay the full amount that was still due under the terms of the original loan.
Because creditors are not permitted to object to the reduction of the balance owed on the debt, and because creditors can’t stop the court from modifying the loan, this process is referred to as a “cram down.”
The easiest way to show how this works is by example.
Let’s say you are filing chapter 13 and you want to keep your car. You have 24 payments left on the original loan and the interest rate is 15%. Your car payments are $500 month. You still owe $10,000 on the car under the terms of the original loan. Because the car is a few years old it is now worth only $5000.
In a chapter 13 “cram down” you can (i) strip down the value of the car to its present value of $5000; (ii) extend the payment term over the length of the plan (usually 36 or 60 months); and (iii) reduce the interest rate to the “Till” rate, which is currently about 4.5%. (The interest rate is describes as the “Till” rate because this interest rate formula was established in the Supreme Court case Till v. SCS Credit Corp., 541 U.S. 465 (2004)).
Under the new terms your payment will be reduced from $500 month to between $100 to $150 month (depending on whether you set up a 36 or 60 month plan). The “unsecured” portion of the original loan (the wiped out $5,000.00) will be paid along with your credit cards as an unsecured claim, usually for a small fraction of the original amount due.
This obviously can help to take pressure off your financial situation and free up funds that can be used to help you get rolling on your “fresh start.”
Photo courtesy of the The Sierra Club
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can the cram down be used to strip a second mortgage on a house?