Cramming Down Means Reducing the Amount That You Have to Pay
Video Transcribed: Edward Kelley, a bankruptcy attorney in Tulsa. In video three of our five-part series on Chapter 13 in Oklahoma, we’ve talked about what’s the difference between a 13 and a 7. Again, Chapter 13 is a personal financial reorganization versus a liquidation. We talked about why would I want to do a 13 instead of a 7. Two big reasons.
One, I make too much money to do a 7. Two, I am behind on a home or piece of property, like a vehicle, and I want to force the bank to let me catch up. Can’t do that in a 7. Can do it in a 13. And on that note, we’re going to talk, as I promise, further about vehicles, and what’s called the cramdown. It doesn’t apply generally to homes. Does apply to vehicles.
Now, if you bought a vehicle new within the last somewhere between two and three years of filing bankruptcy, it’s a little less than three years at present, the car manufacturers have lobbied and gotten a provision that will not allow you to cram it down…
Or I guess I should say first, cramming down means reducing the amount that you have to pay in order to keep that vehicle to the actual value of that vehicle. What does that mean? Often you owe $15,000 on a car that you could sell for no more than $5,000.
The common term is you’re upside down. Now, if you just bought that vehicle and then you file bankruptcy, again, almost up to three years, you’re out of luck. If you want to force them to let you catch it up, and you want to keep, you can do that, but you’re going to have to pay what you contracted to owe.
In that example I just said, you’d have to pay the whole $15,000, the regular payment plus at least one 60th, meaning 60 months of what you’re behind. You have to pay that every month if you force them to keep it.
Now, if you bought it beyond that cutoff, then you can actually submit a plan where you’re only going to pay that $5,000. Let’s round it up to $6,000. In that case, you may be able to pay off the whole car within your chapter 13 plan. So, you no longer owe $15,000.
Now, technically what happens is you owe $5,000 secured and $10,000 unsecured. And if you remember in a 13, you pay based on what you can, not on what you owe, and then everything’s discharged. However, if you want to keep a piece of collateral, you’ve got to pay in at least that amount.
That’s what happens here. For that car that you owe $15,000, you only have to pay $5,000 in the plan. Now, if you can pay more, then you will pay more, but many times chapter 13 is being done by someone who could do it chapter 7, but they’re desperately trying to save a vehicle or house.
Now, of course, you need to be able to make the payment, but you may be in a 13 just for that reason. You don’t have any extra disposable income. You’re just struggling to pay the minimum that you can to keep that piece collateral. In this case, $5,000 versus $15,000. That’s how a cramdown works.
In all cases, you can cram down the interest rate, and this is a great thing. Let’s say you got a 17% interest rate on your car. Well, regardless of when you bought it, you’re going to be able to bring that interest rate down for purposes of bankruptcy to what’s called the till rate. I won’t get into it. That’s referring to a court case that establishes this.
Till was one of the parties. But it’s based on current market standards, 4 to 7%, it varies, but it’s going to be a lot less than what many of my clients signed on for. And you can always do that, whether you bought it in less than three years or not. That’s the power of the cramdown.