What Is A Cramdown In Bankruptcy?
Let’s say that you own a piece of property that is worth $500,000. The problem is that you owe $700,000 on the property, making it $200,000 upside down (or with negative equity of $200,000).
Assuming that you don’t want to keep the property, you can surrender it, and although the property will be taken from you, the good news is that you will never owe the difference (the $200,000) the way that you would if the property was just foreclosed on by the bank.
So that leads to an interesting question. If the bank can’t go after you for the balance on a loan that is not secured by the value of the property (again, in our example the $200,000), can you file for bankruptcy, keep the property and wipe out the excess $200,000, since it’s dischargeable debt anyway?
Cramdowns Are Possible
That is what is known as a cramdown. A cramdown is where a consumer files for bankruptcy, and the amount owed on secured property such as homes, property and cars, is lowered to the value of that property. In our example above, the $200,000 would be wiped out, and the amount owed lowered to $500,000, the market value of the property. At the end of the bankruptcy, the consumer owns the property and only owes the $500,000.
A cramdown is generally not possible in a Chapter 7 bankruptcy. However, in some circumstances, it may be possible in a Chapter 13 bankruptcy. The big caveat though is that cramdowns are not possible for property that is someone’s primary residence.
Moving Out to Get the Cramdown
Could you move out of your primary residence, but keep it in your name, to take advantage of the cramdown provision?
Possibly, but you’d need a significant amount of time to pass, and would need to show that you have no intent of using the property you’ve moved out of as your primary residence. In other words, if this is your plan, you should consult with a bankruptcy attorney very early on and understand that you may not be able to file your bankruptcy right away.
Cramdowns on Cars
You can also cram down a car, although you will have to own that car for about 2 and a half years before you file for bankruptcy to be able to do that.
There is also a process called redemption which allows you to keep the car if you pay off the value of the car (not the full value owed on the loan). In some cases, there may be companies that will loan you the money needed to keep your car by paying its fair market value.
Paying Through the Plan
In some cases, you may have to pay some of what was crammed down through the course of your Chapter 13 payment plan, the way that you would do with any creditor. But that still may be a cheaper option than not filing for bankruptcy at all, and it still allows you to keep the secured property at a fair market value when your bankruptcy case is complete.
Contact the Boca Raton bankruptcy attorneys at the Law Offices of Stephen Orchard at 561-455-7961 for help with your secured property during the course of your bankruptcy.