What is a ‘Cramdown’ in Bankruptcy, and How Can it Help?

The public has been conditioned to view “bankruptcy” as a frightening event. It destroys finances, destroys your credit, and causes families to lose everything they own. Bankruptcy is a big decision that should not be taken without a significant amount of thought and consideration, but it helps countless people get a fresh financial start. 

Businesses have several types of bankruptcies to choose from, but individuals basically have two options: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is what’s often referred to as a liquidation bankruptcy. Chapter 13 is known as reorganization of debts because filers usually get to keep most of their assets. There are benefits and drawbacks to each type, and you should not move forward with either without consulting an experienced Florida bankruptcy attorney. 

One potential benefit of Chapter 13 bankruptcies is the cramdown, or cram-down, option. Many people mistake a bankruptcy cramdown with debt consolidation, but they are separate actions. 

A cramdown is the procedure in which a debtor effectively reduces the amount owed on certain secured debts. A secured debt is a debt that is guaranteed by something tangible. The most common type of secured debt is a mortgage loan, which is technically a lien placed on your house by your mortgage lender.

When you cram down a secured debt in Chapter 13 bankruptcy, you notify your creditors that you will pay them back for your collateral (assets that secure the debts) based on their fair market value—even if the total amount you owe is more than their fair market value. Creditors hardly ever agree to this without court intervention, which is why you need to file for bankruptcy for the best shot at a cramdown. 

Most people who use cramdowns in Chapter 13 bankruptcy use it to pay down car loans. It’s not uncommon for someone to owe substantially more on a car than they would get if they sold the car to someone else at fair market value. It’s a much better deal for car owners to do a cramdown in these situations. 

There are limits, though. One must own a car for at least 910 days before requesting a cramdown; this prevents people from purchasing cars and immediately filing for Chapter 13 bankruptcy. Additionally, debtors are not permitted to cram down mortgage loans on their primary residence. Instead, filers may request cramdowns on investment properties, home goods, vehicles, and various other assets.

Conclusion

A cramdown is an option for certain bankruptcy filers who want to lower principal payments and interest for certain assets. In theory, that sounds attractive to almost every filer. However, a cramdown is only available in certain situations. You should not file for bankruptcy based on the potential for cramdowns alone. 

The Law Offices of Ray Garcia, P.A. understands the difficult financial situation you’re in if you are even contemplating bankruptcy. Filing for bankruptcy could be the best thing for you in the long run, but we are committed to determining that with certainty. The only way to do that is to schedule a consultation to speak with our legal team. Call us today at (305) 227-4030 to discuss your bankruptcy and other legal needs.