What is a “cram down” and how can it help Georgia bankruptcy filers?
Bankruptcies | December 12, 2019
In Georgia, there are two different kinds of bankruptcies for individual filers. In a Chapter 7 “liquidation” bankruptcy, the court appoints a trustee who will oversee the sale of the filer’s assets. The proceeds of the sale will then be distributed among the filer’s creditors. Debts that cannot be paid by the sale of assets are discharged. In a Chapter 13 “reorganization” bankruptcy, the court discharges much of the filer’s unsecured debt, and then creates a plan by which the filer will pay back the secured creditors over a period of time, typically between three to five years.
For the most part, all parties to a Georgia Chapter 13 bankruptcy – including the creditors – must agree to the terms of the repayment agreement. However, an important facet of a Chapter 13 bankruptcy is the court’s ability to discharge the unsecured portion of a secured debt, reducing the total amount owed to the creditor. This is known as a “cram down,” because it is done without the approval of the creditor.
Secured debts are those in which the lender as a security interest in the borrower’s property and can repossess the property if the borrower fails to make payments on the loan. Thus, a common scenario in which a cram down is appropriate is when the filer owns a home or a car but owes more than the asset is worth. This is especially common in car loans due to their rapid depreciation; however, it also happens when a homeowner purchases their home at peak market conditions and sees a sharp drop-off in the home’s value. A homeowner who overborrows against the value of their home can also benefit from a cram down.
When courts cram down secured debt, they will typically reduce the amount owed to the amount that the property securing the debt is worth. For example, if a borrower owes $20,000 on a vehicle that, at the time of bankruptcy, is worth only $13,000, the court may cram down the secured debt to $13,000. The court can also reevaluate the interest rate and repayment schedule for the reduced loan to ensure that the filer will be able to keep up with the payments moving forward. In this situation, the remaining $7,000 of debt converts to unsecured debt.
To qualify for a cram down, a filer must meet specific criteria. For example, in the case of a car loan, the filer must own the vehicle for at least 910 days. This prevents a filer from purchasing a new car and then immediately filing for Chapter 13 bankruptcy. Most other personal property, such as home furnishings and electronics have a one-year ownership requirement.
If you are struggling financially, the Georgia bankruptcy lawyers at Morgan & Morgan, P.C. can help evaluate your situation and provide you with thoughtful, reasoned advice on how to move forward. To learn more about how we can help you put your past behind you and get started on your new financial future, call (706) 752-7089 to schedule a free consultation today.
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