Timing: Qualifying for Cramdown on Personal Property Collateral
Chapter 13 cramdown doesn’t just work for vehicle loans. You can also cram down debt for the purchase of “any other thing of value.”
Our last blog post was about the cramdown of vehicle loans. Cramdown can significantly decrease your monthly payment and reduce how much you pay for your vehicle before it’s yours. To qualify, your loan has to meet some conditions. In particular the vehicle loan has to be more than 910 days old when you file your Chapter 13 case. (That’s about 2 and a half years old.)
But cramdown also applies to other kinds of purchase loans with collateral, not just vehicles. And instead of 910 days there needs to be only 365 days between your purchase and your Chapter 13 filing.
Cramdown on “Any Other Thing of Value”
In a Chapter 13 case you can do a cramdown on loans with collateral that is “any other thing of value.” (See Section 1325(a)(5) of the Bankruptcy Code, and the odd “hanging paragraph” referring to that subsection, found right below Section 1325(a)(9).) So you can often reduce monthly payments and reduce how much you pay for that “other thing of value.”
If you bought the “thing of value” by financing its purchase, you can’t do a cramdown “if the debt was incurred during the 1-year period preceding that filing.” (From the same “hanging paragraph as above.) After that 1-year period you CAN cram down that secured debt.
Say you bought a houseful of modest furniture a year and a half ago when you moved your family to your present home. You’d been hired for a promising new job and hoped that it was your ticket for paying off a lot of accumulated debt. But the job did not pay nearly as much as you’d been led to believe. So now you see a bankruptcy lawyer because you need financial relief.
The purchase price for all the furniture a year and a half ago was $7,500. The interest rate on the contract is 18% because of your already weak credit rating. The monthly payment is $250. Because you didn’t have to make payments for the first 6 months, and then you missed payments and accrued late fees over the last several months, the debt is now still $7,000.
Because most furniture depreciates very quickly it’s all now worth only $3,000.
So if you now file a Chapter 13 case you can do a cramdown on this furniture loan. You qualify because you bought the furniture more than a year ago.
Through your Chapter 13 payment plan you’d pay the $3,000 value of the furniture, the secured part of the loan. The interest rate gets reduced, let’s say to 5%. The monthly payment would go down to, say, $100. You’d pay these $100 payments for around 32 months during your 3-year plan.
You’d pay very little on the remaining $4,000 unsecured part of the $7,000 debt. That $4,000 would simply be added to the rest of your “general unsecured” debts. These include any medical bills, credit card debts, and most other debts not secured by collateral. These would all receive whatever money you could afford to pay during the 3-year payment plan—beyond your reasonable living expenses and other higher priority debts (such as the secured part of the furniture loan).
At the end of 3 years your Chapter 13 case would be finished. You’d have paid off the $3,000, saving money from the lower interest rate, and saving cash flow through the much lower monthly payment. You’d have paid little or nothing on the $4,000 unsecured part of the debt. Yet you’d own the furniture free and clear, having paid way less than half of what you would have otherwise.