Individuals facing crushing debt can often find relief from their creditors through the filing of a personal bankruptcy. Certain individuals who qualify can file under Chapter 7 of the Bankruptcy Code and seek discharge/elimination of their debts (though not all types of debt can be discharged). Other debtors are required to file under Chapter 13, which requires that payments be made on the debts. Experienced and proven bankruptcy lawyers, like those at Guardian Litigation Group, can help determine if you are eligible for Chapter 7 or Chapter 13 and can help you consider other options (like debt negotiations).
If a debtor files under Chapter 13, there is a mechanism called a "debt cramdown" that can help reduce how much must be paid back with respect to three types of debts — automobile loans, collateralized personal property loans, and investment properties. Note that the cramdown procedure is not available for loans related to a debtor's personal residence.
Further, debt cramdown is only available under these conditions:
- The asset's value must be less than the amount due under the loan
- The loan in question must be an "old loan" -- at least 910 days old for automobiles/vehicles and personal property and at least 365 days old for real estate investment loans
- The loan must be fully paid by the end of the Chapter 13 payment plan
Consider a simple example involving a vehicle loan. Originally, the debtor bought the vehicle for $50,000. Let's say the vehicle is more than 910 days old when the bankruptcy petition is filed (so, the loan is eligible for a cramdown based on age). Now, let's assume the value of the automobile is now only $25,000 but the loan balance is $35,000. The cramdown procedure can be used to reduce the principal due on the loan to $25,000 with the remaining $10,000 being converted into unsecured non-prioritized loan status. The same procedure can be used for other types of personal property encumbered by collateralized loans like household furniture, lawn and gardening equipment, and more. Often these types of consumer items are bought with credit from the retail outlet where the items are purchased.
Under the Chapter 13 provisions, loans owned by the debtor are broken out into several categories. One of these categories is called "secured" loans which are loans that are collateralized by some asset (like the automobile for an automobile loan). Another category is labeled as "unsecured non-priority" loans. These loans have no attached collateral. Credit cards and medical bills are examples of unsecured non-priority loans. Generally, secured loans must be paid in full while unsecured non-priority loans can be paid in part (maybe 10 cents on a dollar). So, in our example, the cramdown procedure bifurcates the original $35,000 loan into a secured portion ($25,000) and an unsecured nonpriority portion ($10,000). The first portion must be paid in full while the remaining $10,000 can be paid in part. This is obviously very helpful for the debtor.
As noted, the cramdown procedure can be used for investment property (such as rental property). However, this option may not be viable if the debtor cannot pay off the investment loan by the end of the payment plan (usually three-to-five years).
It is important to seek advice and counsel from dedicated bankruptcy attorneys because, under the law, there are nuanced exceptions to some of these rules. For example, under the holding of the case In re Penrod, the cramdown procedure can be used to bifurcate out the "negative equity" of a trade-in vehicle used to purchase a debtor’s current vehicle even if the current loan is less than 910 days old.
Contact an Experienced Debt Relief and Debtors’ Rights Attorney
For more information, contact the Debtors’ Rights attorneys at Guardian Litigation Group. We will fight for you. We can help with an individual creditor or a group. We can help if you need debt reorganization or debt discharge. We have the tools and experience you need. Our mission is to provide unparalleled legal services and support for those being crushed by their debts and harassed by their creditors. We can be reached via our contact page or by phone. We also provide debt settlement and negotiation services.