Am I Eligible for Cramdowns or Lien Stripping in a Chapter 13 Bankruptcy?

 Posted on June 30, 2021 in Chapter 13

Anyone who struggles with significant debts will want to understand the options that may allow them to reduce or eliminate what they owe. Chapter 7 bankruptcy is often the ideal option for those who do not own significant assets since it can be completed quickly and will allow a person’s unsecured debts (such as credit card balances) to be discharged. However, those who have secured debts (such as a mortgage or car loan) or who own significant assets may need to use Chapter 13 bankruptcy. In these cases, debtors may have options for reducing the debts they owe through methods known as “cramdowns” and “lien stripping.”

Addressing Secured and Unsecured Debts in a Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, a person’s unsecured debts will be consolidated into a repayment plan. The debtor will make payments on this plan over a period of three to five years, and once all payments in the plan have been made, the remaining unsecured debts included in the plan will be discharged. Typically, a person will need to make ongoing payments on secured debts along with the payments made during their Chapter 13 repayment plan. 

Chapter 13 bankruptcy usually will not be used to discharge secured debts since non-payment of these debts would result in the creditor repossessing the property used as collateral for these debts. However, a debtor may have options for reducing the amount of their secured debts.

A cramdown may be used to reduce the amount of certain types of loans where a person owes more on the principal of a loan than the property purchased through the loan is worth. This option may be used for auto loans in which the value of a car has decreased, and the principal owed on the loan may be reduced to the current value of the vehicle, with the remaining amount being included in the Chapter 13 repayment plan.

Cramdowns usually cannot be used for a home mortgage, and a Chapter 13 bankruptcy typically will not reduce the principal for this type of loan. However, lien stripping may be used to classify any second or subsequent mortgages as unsecured debts. These debts will be included in the repayment plan, and they will be discharged once the plan has been completed.

Contact Our Boerne Chapter 13 Bankruptcy Attorney

By working with a skilled and knowledgeable attorney during the bankruptcy process, you can understand your options for reducing or eliminating different types of debts. The Law Offices of Chance M. McGhee can ensure that you meet all legal requirements when filing for bankruptcy, and we can assist with other forms of debt relief, such as negotiating loan modifications with creditors. Contact our Schertz, TX bankruptcy lawyer at 210-342-3400 to set up a free consultation.

Sources:

https://www.investopedia.com/terms/c/cramdown.asp

https://homeguides.sfgate.com/strip-away-second-mortgage-through-bankruptcy-96988.html