One Piece of Your Florida Bankruptcy Tool Kit: Understanding a Cram Down

If you’ve been considering bankruptcy or discussed your options with an Orlando bankruptcy attorney, chances are you’ve come across the term “cram down.” The meaning of the phrase isn’t immediately obvious and many of the definitions out there are a little confusing, so here we’re just getting right down to the basics of what a cram down is and who might want to consider one. Let’s start with a simple definition.

In a Chapter 13 bankruptcy, a debtor may “modify the rights of holders of secured claims.” With the assistance of your Florida Chapter 13 bankruptcy attorney, you may be able to modify the rights of an existing contract or in other words, change the terms of how you had previously agreed to repay a debt. Typically, cram downs are used on car loans in a chapter 13 bankruptcy proceeding, but may also be useful with other types of loans, including those secured by real property.

Back to the Original Question: In a Florida Bankruptcy, What is a Cram Down?

As an example, let’s take a driver who buys a car worth $15,000 but because of the lending rates, late fees or simply the devaluation of the car when it’s driven off the lot, the driver owes closer to $20,000 on it, or $5,000 more than the car is actually worth. As more and more Floridians have lost jobs to the poor economy or have gone through an unexpected, expensive medical experience, more and more car loans look exactly like this.

Queue the cram down. The cram down agreement would result in that extra five thousand dollars being classified, through bankruptcy, as an unsecured claim. The breakdown looks like this:

  • Value of car: $15,000
  • Amount owed on car: $20,000
  • Secured amount, as part of a Chapter 13 bankruptcy filing: $15,000
  • Unsecured amount, as part of a Chapter 13 bankruptcy filing: $5,000

The secured portion of the debt, $15,000, would be included in the repayment plan that you have developed with your Florida bankruptcy attorney as part of your Chapter 13 bankruptcy filing. You would be required to repay the secured amount. Once you’ve completed your Chapter 13 bankruptcy, the unsecured portion would be discharged for pennies on the dollar, meaning you would essentially be erasing the $5,000 unsecured portion for much less than $5,000.

There may be additional savings in the interest rate that is applied to the secured amount. This is often less that the interest rate that was originally agreed on when the car was purchased.

There are some limitations. For instance, you must have owned any car you are attempting to “cram down” for around two and a half years, or 901 days, to be exact. Furthermore, you cannot cram down a property that you call your primary residence. In any event, a cram down can be an incredibly powerful tactic to employ in a Chapter 13 case. A bankruptcy attorney in your area can fully explain all your options based on your financial situation.

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