Understanding Cramdown in Bankruptcy

Do you know what is a cramdown in bankruptcy? This means that a person filing bankruptcy will pay the reduced current value of a secured lien rather than what he was supposed to pay as per the original agreement. This is essentially a legal way to get rid of a part of the debt.

The bankruptcy court, in case of a cramdown, will take steps to interchange the sum that you are supposed to pay on a specific item with a new value which is determined keeping in mind the present value of the item. Sounds confusing? Let’s have an example to make things clear. Suppose you have brought a vehicle on loan. The value of the vehicle was $20,000 at that point of time. Now that you are filing bankruptcy, the value of the vehicle has dropped to $16,000. So now you will need to pay just $16,000 to your creditors.

The Cramdown option is used to lower a debtor’s secured debt. Of course, whether you would be eligible for a cramdown or not will depend on your financial condition. Cramdown is applicable exclusively in case of Chapter 13 bankruptcy. It also depends on the time factor. In case you have a two wheeler and you want a cramdown on it, you would need to be its owner for at least 910 days. It is possible to cramdown items like furniture, appliances, jewelry etc. But you must be the owner of these items for at least 365 days for the cramdown method to be applicable.

Under ordinary circumstances, a mortgage payment cannot come under the cramdown option. So a mortgage payment cannot be simply replaced even if the asset is presently worth less than price that was mentioned in the contractual agreement. To reduce the mortgage payment you need to start an adversary proceeding which is a highly complicated process. So you can consider stripping a second mortgage in case you want to lower the mortgage payment on your home.