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Paying NJ Secured Creditors Less Through A Bankruptcy Cramdown

woman paying through bankruptcy cramdownOne of the several benefits of filing for Chapter 11 or Chapter 13 bankruptcy reorganization are the “cramdown” provisions. A cramdown occurs when a debtor proposes to pay the secured value of collateral instead of the financed amount. This concept is memorialized by Congress in Section 506(a) of the Bankruptcy Code stating, “[a]n allowed claim of a creditor secured by a lien on property to which the estate has an interest…is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property…and an unsecured claim to the extent that the value of such creditor’s interest…is less than the amount of such allowed claim.” 11 U.S.C. 506(a).

In other words, the bankruptcy court replaces the amount that the debtor was initially contracted to pay with the fair market value of the collateral. For example, if a construction company financed a commercial vehicle and currently owes $50,000.00, but the commercial vehicle is worth $25,000.00, the Debtor will have the opportunity to pay $25,000.00, plus interest. The remaining $25,000.00 loan balance will be treated with the individual’s or business entity’s other unsecured debt, such as credit cards, medical bills, and unsecured personal loans.  Most individuals and business entities who file for bankruptcy generally pay less than the full amount of the unsecured debt. At the end of the reorganization plan, the remaining balance of the unsecured debt is discharged.

However, a cramdown is subject to certain time restrictions, which depends on what the collateral is. To cramdown a vehicle, a debtor must have owned the car for at least 910 days (i.e. two and a half years.) prior to the bankruptcy filing.  There is an exception to this rule if the vehicle was bought for the debtor’s business. For all other personal property, the debtor must have owned the collateral for at least one year. This is particularly relevant, if the debtor is seeking to cramdown household goods, electronics, or furniture.

Likewise, while an individual cannot modify a mortgage secured by his or her principal residence, the individual may modify sums owed on investment properties. 11 U.S.C. 1322(b)(2)(“[T]he plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence….”). In Chapter 13 cases however, most courts require that the cramdown loan be paid within three to five years. The vast majority of individuals are unable to pay off a mortgage loan during that limited time, so investment property cramdowns are generally  impractical in Chapter 13 proceedings.

One issue that may arise is when there is a co-signer on the secured debt. If there is a co-signer on the loan, and the co-signer did not file for bankruptcy, then the co-signer remains responsible for the total amount owed on the loan. Therefore, if a debtor is able to discharge $10,000.00 of the secured debt, the co-signer will still remain responsible for the total amount of the loan.

If you are considering bankruptcy and want to take advantage of the cramdown provisions, please call one of our experienced attorneys for a free consultation.

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Whether you need to completely eliminate your debt through Chapter 7 bankruptcy, or need to reorganize your credit payments through Chapter 13 or Chapter 11, we are well qualified as a full-service bankruptcy law firm for people in these and other New Jersey counties: Passaic County, Hudson County, Essex County, Bergen County, Morris County, and Sussex County. Call us today at 973-870-0434 or toll free 888-412-5091.



Guillermo J. Gonzalez

NJ Attorney with extensive experience on Bankruptcy Law Real Property Law, Litigation, and Immigration Law. Dedicated Associate Attorney at Scura, Wigfield, Heyer, Stevens, & Cammarota LLP.

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