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Life after Debtor Bankruptcy: “Cramdown” and the 910 Rule

Life after Debtor Bankruptcy: “Cramdown” and the 910 Rule

There are several different chapters of bankruptcy that an individual may file and each has its own characteristics. One feature in a Chapter 13 bankruptcy is the debtor’s ability to “cramdown” or reduce the principal balance of a secured debt to the value of the collateral. Debtors frequently cramdown the value of vehicles and any other thing of value, other than household goods in order to reduce their debt structure.  For example, if the debtor‘s vehicle is valued at $3,000 but the loan balance is $6,000, the debtor can reduce the vehicle’s debt balance to $3,000. The remaining balance will be treated as unsecured debt in the debtor’s Chapter 13 Plan.

Restrictions

Although the Bankruptcy Code permits a debtor to cram down the secured collateral’s value, a cramdown is not without restrictions.  For example, a debtor may not cram down a vehicle’s value if it was purchased within 910 days from the filing of the bankruptcy and the vehicle was financed via a purchase money security interest, such as either a direct or indirect loan (retail installment contract). If the debtor’s vehicle purchase falls within this 910 day time frame, the entire loan balance must be paid throughout the Chapter 13 Plan. Note, that if the creditor refinances a vehicle loan within 910 days prior to the bankruptcy filing, the debtor can cramdown the value since this rule applies only to funds used to finance the vehicle’s purchase.

Hiday & Ricke has been providing legal services for creditors throughout Florida for many years. We encourage you to call us at 904-363-2769 today to see how we can improve your bottom line and help with your compliance initiatives.

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