Chicago Bankruptcy Question: What is a "cram down" in a Chapter 13?

Chicago Bankruptcy Question of the Day: What is a "cram down" in a Chapter 13 bankruptcy?  When you file for Chapter 13 bankruptcy protection in Chicago, you are required to disclose and schedule all of your assets and all of your debts.  Included are your secured creditors, which are those creditors whose debt is secured by some property owned by the filer.  All of your debts must be treated within your Chapter 13 plan of reorganization.  One of the ways that some secured debts may be able to be treated within your Chapter 13 plan is for them to be "crammed down".

A "cram down" in Chapter 13 bankruptcy basically means that rather than paying the full amount of the debt securing the property, you pay back the fair market value of the property as of the date of filing, with the remaining debt being treated as unsecured.  Assuming a successful completion of the Chapter 13 plan, the lien is required to be released by the creditor and you receive title to the collateral free and clear.  There are three common areas where a "cram down" can be effective in Chapter 13 cases; financed vehicles, financed personal property and investment real estate.

The most common "cram down" in Chapter 13 bankruptcy is that of a financed motor vehicle.  In the Chicago area, a vehicle is valued using the National Auto Dealer's Association (NADA) retail value at the time of filing.  This value must be paid in full with interest through the life of the Chapter 13 plan.  Any debt above and beyond that value is treated as an unsecured debt and discharged at the end of the Chapter 13.  When the U.S. Bankruptcy Code was amended in 2005, it severely limited the ability of a filer to cram down some vehicles.  In short, if a vehicle was financed within 910 days of the filing of the bankruptcy petition, then it is ineligible for a "cram down" and the full balance owed on the vehicle must be repaid through the plan.  This was quite a windfall for the auto finance companies that many bankruptcy attorneys believe is inequitable, but it is the law of the land currently.

Secured personal property can also be "crammed down" in a Chapter 13 bankruptcy in Chicago.  Items such as financed furniture, electronics and appliances are often subject to this treatment, significantly reducing the debts owed to the secured creditors for these items.  The same change in law mentioned above applies to these creditors, but the time frame is only one year instead of 910 days, so it is much less restrictive.

Real property that is NOT the principal residence of the filer may also be subject to a "cram down" in a Chapter 13 bankruptcy.  With the recent real estate crash, this option has become a reality for a significant number of individuals with investment properties.  The key is that the filer must be able to pay the full value of the property back, with interest, within the five year maximum term of the Chapter 13 plan.  So long as that is possible, then the filer can often eliminate significant portions of the mortgages on their investment properties and own them outright at the end of their plan of reorganization.  The bankruptcy code specifically excludes this option for the filer's principal residence.

If you have secured debts and are considering filing for Chapter 13 bankruptcy protection in the Chicago area, having the representation of an experienced bankruptcy lawyer could save you thousands of dollars on your secured debts.  A good lawyer will take the time to review all of your debts, plan the timing of your Chapter 13 bankruptcy to maximize the potential benefits of "cramming down" your debts and zealously advocate on your behalf to ensure that the valuations of the assets are appropriate.  The experienced Chicago Chapter 13 attorneys at Ledford & Wu are always willing to offer you a free consultation to review the facts of your case and recommend an appropriate course of action.

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