Have you ever tried to give a cat a pill? It’s not a pleasant task. You have to pry open its jaws, cram the pill down the poor thing’s throat, then cross your fingers and hope it doesn’t decide to cough it up and force you to start the process all over.
Now, imagine the cat is a creditor watching one of its debtors go through the Chapter 13 bankruptcy process. They want to get paid back for the money they have loaned out. They don’t want the debt they are owed to be forgiven or renegotiated. So sometimes the court has to cram a solution favoring the debtor down the creditor’s throat.
Section 1129(b) of the Bankruptcy Code outlines what has become known as the cramdown process for the way it is crammed down the throats of creditors. It allows a Chapter 13 bankruptcy court to reduce the amount of an outstanding loan to match the value of the property securing it.
What debt can be crammed down?
Only certain types of debt can be crammed down. The biggest restriction is that the debt must be secured debt. A secured debt is a debt that is tied to a piece of real estate or personal property — like a car or a piece of furniture — that can be repossessed by the creditor if the debtor fails to repay his or her debts.
The law further restricts cramdowns by preventing the courts from cramming down the mortgage on the debtor’s primary residence. Mortgages on investment properties may be crammed down, but only if the debtor can repay the debt fully during the 3 to 5 year Chapter 13 process.
Loans on personal property — things that can be owned other than real estate —- can all be crammed down if they were purchased more than a year before the debtor filed for bankruptcy. It is common to cramdown loans on household goods like appliances and furniture.
The most common type of cramdown is a bit harder to get, and that is a cramdown on a car loan. Other than a home, a car is the most expensive item most people will ever purchase. In order to prevent debtors from buying a car, and then cramming the loan down as the vehicle’s value drops, the cramdown law says car loans cannot be crammed down unless the car was purchased over 910 days prior to the bankruptcy filing. This works out to around 2 ½ years.
An example of this bankruptcy tool
This is probably easier to understand with a little example. Say there is a debtor who has filed for Chapter 13 bankruptcy, and this is what they owe and how much that same property is actually worth:
- Primary Residence worth $300,000 with a $450,000 mortgage
- Rental Property worth $200,000 with a $250,000 mortgage
- Furniture purchased 2 years ago, now worth $500, with a $1200 loan
- 5-month-old dishwasher worth $200 with a $500 loan
- Car 1, purchased 5 years ago, worth $7,000 with a $10,000 loan
- Car 2, worth $25,000, purchased last year with a $30,000 loan
If the court does a cramdown, the following debts will remain:
- The mortgage on the primary residence cannot be crammed down.
- The mortgage on the rental property may be crammed down to $200,000 if the debtor can pay off that amount during the Chapter 13 process.
- The furniture was purchased more than a year ago, so the loan can be crammed down to $500.
- The dishwasher was purchased less than a year ago, so the loan cannot be crammed down.
- Car 1 was purchased more than 910 days ago, so the loan can be crammed down to $7,000.
- Car 2 was purchased too close to the date of the bankruptcy filing to cramdown the loan.
Another Tool In The Bankruptcy Toolbox
Cramdowns are another tool in the court’s bankruptcy toolbox. Working with an experienced Milwaukee bankruptcy attorney will ensure that the cramdown process is properly navigated by both creditors and debtors.