How to Make Installment Payments More Affordable in Chapter 13 Bankruptcy?
Updated: Mar 19
This article explains how to make regular payment obligations on secured debt more affordable in a chapter 13 bankruptcy. One significant benefit of chapter 13 is the ability to “cram down” liens by reducing the total debt secured by such lien to the value of the collateral it secures, and also reducing contract interest rate to a market rate of interest.
What’s a “Cram Down”
A cram down is a technical phrase that’s been developed over time by bankruptcy lawyers and judges. A bankruptcy cram down is any type of modification of the pre-bankruptcy agreement between the debtor and creditor. Cram downs are available only in reorganization chapters 11 and 13 (not chapter 7, which is a liquidation chapter. This article focuses only on chapter 13 cram downs but the concept and requirements are generally identical for cases under either chapter of title 11. The authority and requirements for a debtor to cram down a creditor’s lien can be found at Bankruptcy Code §§ 1322(b)(2), 1325(a)(5).
Authority for Cram Downs
Section 1322(b)(2) provides that the debtor’s chapter 13 plan may, among other things:
“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, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims”…
In other words, a debtor can modify secured claims so long as the secured claim isn’t a home mortgage. “Secured claim” is the Bankruptcy Code’s terminology for “lien.” Therefore, as long as collateral securing the creditor’s lien is not the debtor’s primary residence, the debtor’s chapter 13 plan can modify that lien if other requirements are met. Such collateral may include a boat, car, trailer, investment property, or any other asset so long as its not the debtor’s primary residence. Treatment of home mortgages under chapter 13 will be covered in a separate blog post.
Requirements for Chapter 13 “cram down”
The requirements for a chapter 13 plan’s modification of liens are set forth in § 1325(a)(5). With respect to lienholders how have not accepted the chapter 13 plan’s treatment of their lien, § 1325(a)(5)(B)(ii) requires that the chapter 13 plan must provide for the secured creditor to retain its lien and to be paid: “the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim, is not less than the allowed amount of such claim.” 11 U.S.C. § 1325(a)(5)(B)(ii).
In other words, the chapter 13 plan can cram down liens. If the lienholder doesn’t like this, and objects to the chapter 13 plan, then the court must confirm the plan if the plan proposes to pay this objecting creditor with a stream of total payments equal to the present value of the collateral as of the date of plan confirmation. This “present value” requirement comes from the language “value, as of the effective date” under Bankruptcy Code § 1325(a)(5)(B)(ii).
Also, the ability to reduce the lien balance (or cram down) comes from the language “not less than the allowed amount of such (secured) claim.” To determine “allowed amount” of a secured claim, debtors must look to § 506 of the Bankruptcy Code. Section 506(a) provides that a secured claim is only secured to the extent of the value of the asset it secures.
These various rules can be summarized with the following illustration. Assume the debtor owns a rental property worth $600,000 subject to a mortgage of $800,000. This mortgage can be “crammed down” because it is not the debtor’s principal residence. The creditor would have an allowed secured claim of $600,000 because that is the value of its collateral. The remaining $200,000 would be an unsecured claim against the bankruptcy estate and treated as such under the chapter 13 plan.
To confirm the plan, the debtor must propose a stream of payments over time that, when discounted back to the confirmation date, must equal $600,000. If the debtor were to propose a stream of payments that add up to $600,000, the plan would not be confirmed because $600,000 in payments over time would not constitute value “as of the effective date” of the plan.
To determine the present value the debtor may propose a market rate of interest, and in turn reduce the interest rate if such rate is less than that provided in the mortgage agreement.
Link to podcast on cram downs here.