Most of our clients are aware that they can not discharge secured loans in a Chapter 7 bankruptcy, unless they surrender the property. But what most do not know is that with certain secured loans they may be able to keep the property, while paying only a fraction of the debt back to the creditor. This method of paying off a creditor for less than you owe is called a “cram-down” and there are many circumstances in which you can cram-down, or reduce, the amount paid to the creditor and still keep the asset.
Say for example you have a car loan, where you have owed the car for more than 910 days, then you can actually reduce the amount of the car loan in the bankruptcy to the current value of the car, and the rest of the loan becomes unsecured along with your other debts. This is fully within the rights that you have in a Chapter 13 bankruptcy. Other cases were these cram-down provisions apply include non-purchase car loans (loans which were not used to actually purchase the cars), or in connection with vehicles that are not considered to be “personal automobiles”. In each of these cases, you may be able to cram-down the lender and reduce the loan to the current value.
The reason that the court would allow you to do this, is that if you were to surrender the car, or other security asset in the bankruptcy, then the creditors would be limited to recouping the fair market value of the asset by selling it on the open market. So it then makes sense just to allow the debtor to strip off the “unsecured” portion of the lien themselves. Please keep in mind that these cram-down rules have come under significant scrutiny around the country, and as is often the case, different jurisdictions have interpreted these rules differently. As such, it is very important that you find an attorney who intimately understands the cram-down rules and how they have been historically applied in your area. Good luck.
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