Different Types of Bankruptcy
Generally speaking there are two options available to individuals seeking bankruptcy protection: a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. The 7 and 13 found in the title of these bankruptcies refers to the chapter of the bankruptcy code which governs that particular type of bankruptcy. A Chapter 7 case is generally considered a liquidation where you will be required to surrender any unencumbered, non-exempt assets for the payment of creditors. On the other hand, a Chapter 13 bankruptcy helps you reorganize your debt while remaining in possession of your assets. Chapter 13 offers many powerful tools in helping you reorganize, one of which is the “cram down.”
The Chapter 13 Cram Down
In a Chapter 13 case, the Bankruptcy Code permits debtors to modify the rights of secured creditors. A debt owed to a secured creditor is one in which there is property or collateral attached to the debt as security – for example, a debt on a car or a mortgage on a house. The cram-down is typically used on cars. In applying this tool, you will only be required to pay what your car is worth, not what you currently owe. For example, if you owned a 2005 Chevy Suburban that was worth $15,000, but you owed $25,000, in a Chapter 13 case, you would only have to pay the value of the car ($15,000) and the remaining balance would be discharged. The only limitation to this rule is that you must have purchased the car at least 2.5 years before you file for bankruptcy. If you purchased your car less than 2.5 years ago, this option is not available.
How the Cram Down Can Help
In addition to cars, the cram down can be used on almost any other secured debt including investment or rental properties. It cannot, however, be used on your personal home. If you would like to discuss the cram down option or to discuss bankruptcy and how it can help you, Arizona Bankruptcy attorney John Skiba offers a free bankruptcy consultation.