How Chapter 13 helps you keep personal property collateral on a debt (such as furniture bought on credit) for less money through cramdown.
Last time we explained how you may be able to reduce the monthly payments, interest, and overall cost of a vehicle loan through Chapter 13 cramdown. The debt must be at least 910 days (two and a half years) old. Plus the more the vehicle is worth less than the amount owed the greater the likely savings. (See the “hanging paragraph” after the end of Section 1325(a)(9) of the U.S. Bankruptcy Code.)
This cramdown—the re-writing of loan terms—also applies to debts secured by personal property collateral other than vehicles. The debt must be at least 1 year old when you file the Chapter 13 case to do the cramdown. Here’s an example to show how this works.
Creditor Leverage under Chapter 7
Jason and Mary bought a set of bedroom furniture for their 13 and 16 year old daughters 18 months ago. They bought it on credit, and owe $3,800 on the debt. They owe so much because they could make no payments for the first year. With the wear and tear on the furniture it now has a fair market value of about $1,200.
They are now considering bankruptcy because Mary lost her job a year ago, is now working for less pay, they owe $75,000 in other unsecured debts, and are 2-3 months behind on all of their monthly payments. Some debts are with collection agencies; some have threatened to sue.
On the furniture debt they are two months behind on the $100 payments. The creditor is threatening to repossesses the furniture.
If Jason and Mary file a Chapter 7 case they could surrender the furniture, and the debt would be discharged—forever written off. But their girls really need the beds, desks, and chests of drawers. Given their age and the tension the family has undergone it would be rather traumatic for them to lose their stuff. Jason and Mary don’t have the money or credit to replace it.
So they would likely have to “reaffirm” the debt to keep the furniture—legally recommit to pay it. They could well be stuck with the original payment terms, including the full balance of $3,800, a high interest rate, the $100 monthly payments, and the risk that down the line they wouldn’t be able to make the payments. Then the furniture would still be repossessed, and they’d almost certainly still owe a lot on the debt.
So Mary and Jason understandably would rather not recommit to paying $3,800 plus interest for furniture now worth only $1,200.
Chapter 13 “Cramdown”
Since they bought the furniture more than a year ago, through Chapter 13 Mary and Jason can do much better. Through cramdown they can in effect rewrite the terms of the debt based on the value of the furniture.
Through cramdown the $3,800 debt is divided into two parts. One $1,200 part is based on the value of the collateral, and the other part based on the remaining $2,600 debt amount. Their Chapter 13 plan treats the first part as secured, and the other part as unsecured.
So over the course of their 3-to-5-year Chapter 13 plan Jason and Mary would pay the creditor $1,200, plus a modest amount of interest. The payments would receive $40 per month, paying off the $1,200 plus interest in a little less than 3 years. That would pay off the secured portion of the debt. The remaining $2,600 would be lumped in with the other $75,000 in unsecured debts. Jason and Mary would pay only a portion of this $77,600 based on what they could afford to pay. The amount they’d pay would be based on the extent to which they had any remaining “disposable income” during their Chapter 13 case, after accounting for reasonable living expenses. In many Chapter 13 cases the general unsecured debts receive only a few pennies on the dollar. Sometime they receive nothing.
So the end result in a Chapter 13 case would be that Mary and Jason would:
- avoid the repossession of their daughters’ furniture
- not have to catch up on their late payments on the furniture debt
- reduce the monthly payment from $100 to $40 on this debt
- reduce the total paid for the furniture from $3,800 plus interest to as low as $1,200 plus interest
- be protected from future repossession of the furniture
- receive, at the end of their Chapter 13 case, a discharge of the remaining unsecured debt