What is a Cram-Down?
Bankruptcy has the answer: the cram-down. A cram-down is when one pays off the value of an item with a lien in Chapter 13 Bankruptcy and any remaining balance is discharged. For instance, if your car is worth $2,500, but your loan is $15,000, you would only pay $2,500 to clear the title, and $12,500 would be discharged at the end of your Chapter 13 Bankruptcy.
The value of the item that you are paying back must be paid within your Chapter 13 Bankruptcy Plan, which lasts between 3 to 5 years. So, in this example, your $2,500 would need to paid in full through your Chapter 13 Bankruptcy Plan within 5 years. Only then, would the rest of the debt be discharged and your title cleared.
Can I Do This With All My Property?
No, there are restrictions. Cram-downs are only available on property with a lien. This usually means car loans, furniture loans, and home loans. This really is not a restriction, however, because if there is no lien on the property, you do not have to pay any of the loan back in bankruptcy to keep the item. The debt is subject to a regular discharge, and you can keep the item (assuming that there are no other bankruptcy issues).
However, there are two big restrictions that affect car loans, furniture loans, and home loans: (1) the 910 Rule, and (2) the 1 Year Rule.
- The 910 Rule. The 910 rule only effects cars and trucks with liens. To be eligible to cram-down a car or truck in Chapter 13 Bankruptcy, you must have owned the car with the same loan for 910 days (two and a half years). It prevents people from knowingly buying cars or trucks at outrageous prices with the intention of cramming-own the loan shortly after purchase.
- The 1 Year Rule. The 1 Year Rule applies to all other items with liens, mostly furniture and home loans. To be eligible to cram-down any lien (except car or truck loans), you must have owned the item for at least 1 year. This means that if you want to cram-down furniture bought at a huge mark up or at a huge interest rate, you need to make payments for a year.
Can I Cram-Down My House?
Yes, the Bankruptcy Code allows for a cram-down on a home loan, but there is a practical problem with cramming-down your home, the length of Chapter 13 Bankruptcy Plans. For all cram-downs, the value of the item, which you are repaying through your Chapter 13 Bankruptcy Plan, must be paid off in full by the end of your Chapter 13 Bankruptcy Plan, which run between 3 and 5 years. This means that you would have to pay off the full value of your home within 5 years to cram-down your home.
In the end, the ability to cram-down bad vehicle loans, furniture loans, and home loans in Chapter 13 Bankruptcy allows individuals who have been taken advantage of by unethical dealerships or circumstances to pay a fair price for their property and get out from under a bad debt.