Under a reorganization bankruptcy, a debtor can pay for almost all types of secured property by utilizing the collateral’s current worth rather than entire debt. This is called a cram down. In this procedure, the payment of debt is pretty much forced on the lender or creditor. The present worth of the collateral is based on its price at the time of bankruptcy filing. However, since the amount is paid for a specific time period, the amount becomes increases because of the interest rate. It is just like taking a loan and paying back the borrowed amount within a certain time frame at an interest.
But there are three kinds of property loans that cannot be crammed down in Chapter 13 bankruptcy. These are home loans, loans for private vehicles obtained within 2.5 years before filing, and loans to buy another property within 12 months before the bankruptcy filing.
If you own a valuable property that is exempted from cram down, you will probably save more money in a Chapter 11 bankruptcy than Chapter 13 case. Although Chapter 11 filing fee is considerably higher, you do not need to pay for the trustee’s commission.
You can save money in two different ways. First is by being allowed to cram down a property that is otherwise exempted under Chapter 13 and probably reduce the interest rate. Second is by spending less on the “trustee commission”. If you have a valuable secured property, you may have to spend $1,000 more for the Chapter 11 filing fee, but you would also save $10,000 to $30,000 on the commissions of a bankruptcy trustee.
Cram down does not apply to home mortgages. This is because the amount of savings that homeowners can benefit in a cram down would have to be balanced out by the higher mortgage costs that other future borrowers would have to pay. The creditors would pass on the increased risk of lending to future borrowers by asking for larger down payments, higher interest rates, or more closing costs. If lenders will not do these things, they would have to reduce their profits.
Claims of vehicle loans are treated based on how long ago a vehicle was acquired. Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, also called the new bankruptcy law, there was no 910-day rule for motor vehicles. The rule was enacted to prevent individuals from purchasing motor vehicles and then filing bankruptcy so that they did not have to pay the entire debt.
When computing the cram down, it is necessary to find out the present value of the collateral and the rate of interest to be charged. Normally, these two variables are litigated and unless these variables agreed upon, a court will not confirm a payment plan. If you do not agree to the terms of payment, you have the option to give up the collateral.