“Cram Down” a Creditor


A Plan in Chapter 13 may be used to force a secured creditor to accept an “adjusted” debt amount and take lower payments over time. This is most often used to adjust debts on motor vehicles and other personal property collateral such as furniture and appliances. Let’s see how this works using a motor vehicle loan as an example.


Suppose the debtor possesses a car worth $5,000.00, but there is $10,000.00 owed against it. Lets also suppose the debtor is running two, three, four months behind on their automobile payments and the car is about to get repossessed.

Remember, the filing of the Chapter 13 case will immediately protect the debtor’s possession of the collateral and stop the repossession. And in the Plan, the debtor may propose payments to the creditor for the current market value of that automobile without regard to the actual contractual balance.

In this example, the debtor may propose a plan to pay the creditor the $5,000.00 (the current market value of the vehicle) and to pay that to the creditor in installments over a period that usually is going to be 36 months. This is the secured value of the lien.

We call this process a “cram down”, because the secured claim has been “adjusted” and “crammed down” to the current value of the collateral. The law does require that the debtor must pay some interest to the creditor. Interest will be paid on the secured claim ($5,000) to compensate the creditor for the value of the delay in collecting the current market value of the automobile. However, the interest rate is often reduced below what the contract rate was originally.

JEFF’S TIP: Be careful! There is an exception to cram down on motor vehicles. An important exception to the “cram down” rules was included with the new bankruptcy law (2005). Under the new law, the debtor may not force a “cram down” on a secured purchase money motor vehicle loan that was incurred within 910 days prior to the bankruptcy filing. However, the cram down should still be effective on any non motor vehicle obligations, such as appliances and furniture.

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