A Chapter 13 Bankruptcy provides some unique options that are not available in a Chapter 7 Bankruptcy. One option is Avoiding Second Mortgages, as discussed in my last blog, and another great option is the Cram Down. 

The general principle of the Cram Down is to allow a debtor to keep an item with secured debt and to pay it back at its fair market value and at a reasonable interest rate.  A secured debt is debt that, if not paid back, you will have to return; such as a car, furniture or computer.  In contrast, unsecured debt is debt such as medical bills, credit cards and broken leases with no particular item associated with the debt. 

To qualify for a Cram Down when filing bankruptcy in Indiana, an item must have been purchased more than 910 days prior to filing your Chapter 13 Bankruptcy and the fair market value (amount a willing buyer would pay or blue-book value) must be worth less than what is owed.  During the life of your Chapter 13 Bankruptcy, you will pay off the entire fair market value of item.  At the end of the bankruptcy all remaining amounts owed will be discharged along with the rest of your unsecured debt.

For instance, let’s assume a debtor purchased a vehicle three years ago that has a remaining loan balance of $10,000 and 12.5% interest.  If the fair market value of the vehicle is only $6,000, then the debtor can propose to pay back $6,000 in the bankruptcy at a more reasonable interest rate such as 6%.  The remaining $4,000 of the loan balance will be classified as unsecured debt, and will be discharged at the end of the bankruptcy plan.

The Cram Down offers the advantage of paying less than the amount owed on a secured item at a lower interest rate, and also offers the debtor the ability to spread the amount paid over the life of the bankruptcy. So in the example above, let’s further assume that the debtor has 14 remaining payments at $800 each until the $10,000 was repaid.  If the debtor files Chapter 13 Bankruptcy and the bankruptcy lawyer proposes to pay back the $6,000 fair market value of the vehicle in a 36 month bankruptcy plan, the average monthly payments applied to the vehicle would be reduced from $800 per month to under $200 per month.