Vehicle Cram Downs

Wed, Sep 12, 2012


No, this is not the newest monster truck event! Vehicle cram downs happen in Chapter 13 bankruptcy, not on the racetrack.

Chapter 13 bankruptcy cases involve payment plans that you work out with the courts–it does not make the debt just go away. All the re-negotiated debt is rolled into one amount, with one balance due, by the trustee. When the payment is due, you pay the trustee only. The trustee then distributes the money to your various creditors. (This is very different from Chapter 7 bankruptcy.)

Back to the cram down. A cram down means that you only owe the replacement value of a vehicle as part of your secured debts in a Chapter 13 bankruptcy. The amount due is “crammed down” to the lower and more accurate property value. For example–if you owe $50,000 on a car worth only $35,000, then you can effectively make it so that you only owe $35,000 in secured debt to that creditor for the purposes of bankruptcy–a significant savings in a bankruptcy case. (This is all subject to time limits, appraisals, and other rules–so make sure you speak to your representing attorney about the specifics.)

You would still owe that $15,000, but it is now unsecured and handled differently from secured debt. (Secured debt is anything that has collateral to back it up. Unsecured debt is debt, usually credit cards or the like, that has no collateral against it.) Secured debt must be paid back in its entirety, but unsecured debt is not always paid back in full. It is sometimes reduced or dismissed depending on the debtor’s circumstances.

SmithLaw’s blog recently examined lien stripping of debt in Chapter 7 bankruptcy. (Similar to cram downs, lien-stripping breaks down debts to secured and unsecured amounts if the collateral is under water.) The new ruling in the Chapter 7 case was an exciting development, since it previously had only applied to Chapter 13 bankruptcy. Attorney Christopher D. Smith is very pleased to hear of this ruling for its clients, since it opens up new possibilities for many debtors going through bankruptcy.

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