Jacksonville Bankruptcy Lawyer Blog
One of the best benefits of declaring a Chapter 13 bankruptcy in Jacksonville, Florida is the ability to “Cram Down” certain assets such as a car loan, certain real estate debts, or even some personal property. A cram down allows debtors to lower the principal balance and interest rates on debts they owe on secured debts. A Jacksonville Bankruptcy Attorney can help you determine if any of your debts might be eligible for a cram down through bankruptcy.
So how does an asset qualify for a cram down? First, the debt must be a secured loan. A debt is a secured loan when a lender has a security interest in the asset or collateral. This interest grants the lender certain rights to the asset, such as the right of repossession of the item if the debtor defaults on his or her payments. The most common type of security interests are found in cars and houses.
A cram down can occur when a person declares a Chapter 13 Bankruptcy. Unlike a Chapter 7 Bankruptcy, this type of bankruptcy requires that the debtor pays back his or her debts through a repayment program, which lasts 3 to 5 years. It is important to note that a person’s homestead property does not qualify for this benefit.
Most often cram downs are used on car loans. The best way to explain how this process works is to show through an example. In this situation, the debtor has a vehicle that is worth $9,000 but the loan balance remaining is $16,000. By declaring a Chapter 13 Bankruptcy, the owner of the car can cram down the loan balance to be equal to the car’s value, or in this case $9,000. The difference of the loan value before the cram down and after, in this example, is $7,000, will then be lumped in with the debtor’s other unsecured debts. This means the debtor will only pay a small portion of the crammed down value with the other unsecured debts on his or her repayment plan, and the remainder will be wiped out once the repayment plan is completed.
Other Benefits of a Cram Down
Another great benefit to cramming down debts is that it may allow a debtor to reduce his or her interest rate and to prolong payments over a longer period of time. This means cramming down debts can lower a person’s monthly payments. The interest rate that a debtor pays after he or she declares Chapter 13 Bankruptcy is determined by the bankruptcy court and will often times be lower than the original interest rate. Since the repayment plan lasts 3 to 5 years, the payments may then be lower since if they are being stretched out over a longer period of time.
Restrictions
There are some restrictions on when a cram down can occur. For cars, Congress passed what is commonly referred to as the 910-day rule. This rule states that if a person wants to cram down a car loan, the vehicle must have been acquired by the debtor more than 910 days prior to declaring bankruptcy. 910 days is about 2 ½ years, which for most people isn’t a problem. Cars depreciate value immediately after they are purchased, so this law was enacted to prevent people from abusing the system and immediately trying to cram down car loans right after the purchase. The other big rule to take note of is the one year rule for personal property such as furniture or household goods. This rule states that personal property must be owned for one full year before its loan value may be crammed down.
For more information on how your assets can be crammed down through a Chapter 13 Bankruptcy, call The Law Office of David Goldman, PLLC today to speak with an attorney.