The Short Answer
A cramdown in bankruptcy lets you reduce what you owe on a secured debt — like a car loan — down to the actual current value of the item, rather than the full balance you contracted to pay. This tool is only available in Chapter 13 bankruptcy, not Chapter 7. Whether you can use it depends on what type of property is involved and how long you've owned it. For vehicles, you must have owned the car for at least 910 days before filing. For other personal property like furniture or appliances, the ownership requirement is at least one year.
A cramdown in bankruptcy is when the debtor only pays the value of the item they have financed. In reality, it is a court approved way to get out of some of your contractual obligations. The court replaces the value that you are contracted to pay on a certain item with an approved current value of that item. To give an example, if John Doe financed a car and he owes $15,000 on that car, but now the car is only worth $10,000, then when he files bankruptcy he has the ability to only pay the $10,000 the car is worth. The cram down is a tool used in bankruptcy to lower a debtor’s secured debt and is filed in your Chapter 13 bankruptcy plan, subject to approval by the court (11 U.S.C.S. § 1325 (1)(5)(b)).
A cramdown is only available after a certain amount of time has passed, and that time period depends on what the item is. For example, to cram down a car, a debtor must have owned that car for at least 910 days (two and a half years) at the time they file the bankruptcy. If John Doe has owned a car for at least 910 days then he can replace the current value of the car, not how much is owed in his financing contract, on his Chapter 13 bankruptcy plan. Other items that can be “crammed down” in a bankruptcy are things like furniture, jewelry and appliances or other personal property. A debtor must own these items for at least one year at the time of filing in order to use the cram down method.
A mortgage payment is not something that can usually be crammed down in the traditional sense of the term. Even if the value of a home is less than what one owes on the home, a mortgage is not something where a value can simply be replaced. In order to lower the amount one owes on their home they must file an adversary proceedings and, in general, it is a much more difficult process. Because of the difficulty and different proceedings used to adjust a mortgage payment (including second and third mortgages) cramdowns are not used to lower the amount one owes on their house. Instead, you should look into stripping a second mortgage. However, at times, you could possibly cramdown a mortgage on a rental property or secondary real estate.
Cramdowns are generally not an option in Chapter 7 bankruptcies.
Key Takeaways
- A cramdown reduces your secured debt to the item's current fair market value — so if your car is worth $10,000 but you owe $15,000, you may only have to pay $10,000 through your Chapter 13 plan.
- To cramdown a vehicle in bankruptcy, you must have owned it for at least 910 days (roughly two and a half years) before your filing date.
- Personal property like furniture, jewelry, and appliances can also be crammed down, but only if you've owned them for at least one year at the time of filing.
- Primary home mortgages cannot be crammed down — reducing what you owe on your home requires a different legal process, such as an adversary proceeding or lien stripping for second mortgages.
- Cramdowns are filed as part of your Chapter 13 bankruptcy plan and must be approved by the court under 11 U.S.C. § 1325(a)(5)(B).
- Rental properties and secondary real estate may qualify for a cramdown in some situations, unlike a primary residence.
Attorney Insight
The 910-day rule on vehicle cramdowns catches people off guard more than almost anything else in Chapter 13 planning. I'll have a client come in excited about cramming down a car they bought 18 months ago — and we have to deliver the difficult news that they're simply not there yet. If you financed a car recently and you're already underwater on it, the timing of when you file can make a significant difference in what your plan pays. That's the kind of strategic calculation that separates a well-built Chapter 13 plan from one that leaves money on the table.
