Cramdown auto debt in Chapter 13 Wilmington bankruptcy
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The benefits of filing Wilmington Chapter 13 bankruptcy are many. For one, it stops debt collection efforts immediately so you can have some breathing room to collect your thoughts and make a plan for your financial future. For another, Chapter 13 can stop foreclosure and repossession and allow you to time to catch up on past-due balances, so you don’t lose your assets with valuable equity. Chapter 7 offers many benefits too, but one of the most valuable is strictly limited to Chapter 13 bankruptcy – the cramdown.
What Is a Cramdown?
A cramdown is a facet of Chapter 13 bankruptcy where you can reduce the principal balance of a debt. The principal balance is how much you owe for the asset. Interest is charged on the principal balance. By reducing the principal, you’ll pay less on that plus less on interest. A cramdown allows you to reduce the principal to match the fair market value of the asset. In Chapter 13 bankruptcy, the asset most often associated with cramdown is a car loan.
It’s important to note that you can’t buy a car, file bankruptcy, then ask for a cramdown. The loan must have been outstanding for 910 days or more when you file Chapter 13. So, if your car loan is a few years old, it might qualify. The next important part is that the principal balance owed is greater than the market value of the vehicle. For instance, if you have a truck worth $5k but the principal on your loan is $8k, and the loan is older than 910 days, it should qualify for cramdown.
Your bankruptcy attorney can request as part of your case that the loan value is reduced to market value. On top of that, your interest rate might also be eligible for decrease depending on how high it is. A third advantage of cramdown is that you may get longer to pay back the loan. This can save you significantly on principal and interest while making it easier to keep up with your bankruptcy payments by making your car loan more affordable.
Cramdown Applies to Other Assets Also
One lesser-known aspect of Chapter 13 cramdown is that it applies to other secured assets as well – not just vehicles. A cramdown can apply to anything of value that is financed with collateral (i.e., a secured debt) might be eligible so long as the purchase and financing agreement was made more than one year before you filed Wilmington bankruptcy. If you bought appliances or furniture that are secured by the asset such that the lender can come collect them if you don’t pay, they might qualify.
If you bought furniture and appliances from a local store for a total of $10k secured debt at least a year ago and the items are now worth $5k thanks to depreciation, your attorney can request the value be dropped to $5k. They can also request an interest rate reduction similar to that on a vehicle cramdown. This can greatly reduce payments, and you might be able to increase the length of the loan to match your Chapter 13 length of plan to lower the monthly installments further.
What Happens to the “Crammed Down” Amount?
It’s important to note that the amount your loan is lessened is reclassified – it doesn’t just disappear. Secured debt is debt that is secured by the value of an asset. So in the case of the car that’s only worth $5k but on which you owed $8k, $5k of the debt is classified as secured (by the value of the vehicle) and the other $3k is reclassified as unsecured since there’s no value or equity supporting it. In Chapter 13 bankruptcy, you’ll pay a far lower percentage on unsecured than secured debt.
That means you might pay pennies on the dollar on the reclassified $3k (or none at all). The same goes for your furniture loan. It’s important that you ask about cramdown when you come in for your bankruptcy consultation to see if you qualify. To find out more, contact the Law Offices of John T. Orcutt. Call +1-919-646-2654 today for a free Wilmington bankruptcy consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.