Chapter 13 bankruptcy allows you to reorganize debt. Reorganizing debt means different things depending on the type of claim. The repayment terms of some types of debts are for the most part unaltered by Chapter 13 bankruptcy. However, car claims can sometimes be changed in ways that save the debtor thousands of dollars.
The term “cram down” is usually associated with car claims in Chapter 13 bankruptcy cases. Cramming down a vehicle means to reduce the amount paid in the case to something less than what would have been paid under the contract terms. This can generally be done in two ways. First, if the debt secured by the vehicle was incurred more than 910 days before the case was filed, then the debtor can force the creditor to accept payment of the value of the vehicle rather than the claim amount as satisfaction of the claim. For example, if the balance of the note is $20,000 but the vehicle is only worth $10,000 then the debtor can file a plan that proposes to pay the creditor only $10,000 in satisfaction of the claim.
There are two things about cramming down a car claim in this way that should be considered. First, the claim is bifurcated, so the unsecured portion doesn’t necessarily go away, but instead it will be paid with the other unsecured creditors. This means that in cases where the unsecured creditors are not going to get paid at all, the debtor pays off the claim for value only, and the remaining amount owed under the contract is discharged. However, in cases where the debtor is paying the unsecured creditors in full the car claim will get paid in full, including the unsecured portion. Keep in mind that unsecured creditors don’t get paid interest, so even if the claim is paid in full the debtor still saves money because the unsecured portion is paid without interest.
The second way to cram down a vehicle in Chapter 13 bankruptcy is to reduce the interest rate paid on the claim. As a general rule, the interest paid in Chapter 13 on cars is between 1 and 3% above the prime rate. Most cases seem to have interest rates on these claims set for 4.5% to 5.5%. If the original interest rate is high, then reducing the rate could save the debtor thousands of dollars.