The Cram down is a powerful tool that you get through the chapter 13.
Video Transcribed: Edward Kelley with 188 Deadline answering your bankruptcy questions. We’re getting near the end of the chapter 13 overview series. So this is video four and we’re going to talk about the cram down. So the cram down generally just applies to personal property and usually comes up in terms of a vehicle, nine times out of 10. So what is a cram down? There’s another powerful tool that you get through the chapter 13. So let’s take the example of the car of course.
So let’s say that you have a car just again to make it easy, worth $10,000 and generally the bankruptcy court’s going to take that straight off the blue book value. Sometimes that can be an argument, but you know, let’s for the sake of this video, let’s just say everyone agrees it’s worth $10,000 and is often the case, especially with people going into bankruptcy.
Your loan, you owe $15,000 on it, much more than the value. It’s what you call it upside down. You have negative equity and your interest rate is 25% that sounds astronomical, but I’ve certainly seen it. So what can a cram down do for you? Well, here’s what, you can’t do it, I’ll start with that. There’s a rule called the 910 day rule, which means that you can’t use the cram down relief if you bought the car within 910 days.
This was something auto industry lobbied hard for dealerships to protect themselves from people who buy a car and then immediately filed bankruptcy just for the purpose of lowering what they owe and their interest rate doesn’t make some sense. So if you bought that with a 910 days and you cannot do this somewhere between two and three years. If you’re outside of that, here’s what you can do.
You take that car, that you owe $15,000 on and cram it down. That’s what I do for you. And lo and behold, you only owe $10,000 on the car. Well actually it’s not quite that easy. There are secured and unsecured debts. We talked about that a little bit before the secured portion of what you owe on that car, meaning the portion of debt that is secured by the collateral of that car now becomes $10,000 equal to what it’s worth. The other 5,000 then becomes an unsecured debt. So as is often the case where most of the debt you’re paying is debt you can’t get rid of otherwise or first on secured property that you want to and then tax debt and student loans and other things that you’re going to have to pay anyway.
Often there’s nothing left for the unsecured creditors. If that’s the case and you’re only going to pay $10,000 to keep that car because the unsecured debt goes into the pool with all your credit cards and everyone else and that dealer is not, or a finance company is not going to get any of that, you’re basically only going to owe 10,000 that you’re going to pay.
Second tool, the interest rate. So let’s take your 25% interest rate. And this is not limited to whether you bought the car within 910 days or not. Some people don’t understand that. You can cram it down, there’s a case called One of the parties in that case is where it comes from, where you can take that 25% interest rate and basically negotiate it down. And attorneys for the dealerships all understand this and you know it varies with the prime rate of interest. But say you can get that 25% down to 5% or 6% and it’s a pretty straightforward process, which can be done in conjunction with the cram down. Or if you’re not allowed to cram down, you can just get that interest rate down.
So it’s another wonderful, powerful tool that you get with a chapter 13. So we’re going to close out this series. In the next video we’re going to talk about your disposable income and ways you can succeed in a chapter 13. The best way to complete it and make it work.