What does it mean to “cram down” a debt in a Chapter 13?

First you should understand that when we talk about “cramming down” a debt, it is referring to a secured debt (such as debts for vehicles, furniture, household goods and appliances).  Referring to a debt as secured means there is some type of collateral attached, which you would lose if you defaulted on the debt.

All secured debts can be stretched out in a Chapter 13 up to the 5 year max period.  This is often helpful by lowering the note.  However, you may find even more benefit within a Chapter 13 regarding secured debts through a “cram down”.

“Cram down” of debt means that you can reduce the amount you must pay to be equal to the current value of the collateral rather than the current amount owed if certain criteria is met.

For secured debts that are for furniture, household goods, appliances, etc that are purchased more than 1 year prior to filing bankruptcy can be “crammed down” to pay in full based on their current value – NOT the current amount owed. For example, you may have purchased furniture at retail price plus interest and fees that totaled $5,000 over a year ago and the amount you still owe is $3,000.  If the value of the furniture is only $1,000 you could potentially “cram down” this debt and pay $1,000 through the Chapter 13 which saves you roughly $2,000.

For vehicles – you must have purchased them more than 2 1/2 years prior to your bankruptcy in order to “cram down” to value.  For example, you purchased a car 3 years ago for $20,000 and still owe $15,000.  The value now is only $10,000.  You will save roughly $5,000 when paying out through the Chapter 13.

A caveat to vehicles important to note:  if the vehicle is in your name (you being the one filing bankruptcy) but used by someone else in the family (spouse, son, daughter, etc) or used for business purposes – it can be paid for at current value regardless of when it was purchased!

And keep in mind that co-signers / co-debtors and others liable on your debts are protected by the Chapter 13 filing even though they are not filing bankruptcy!

And one final note – the interest rate on secured debts is only 7% in a Chapter 13.