Secured debts are handled completely differently in Chapter 13 than in Chapter 7. By filing for Chapter 13 bankruptcy, you can keep property subject to a secured debt even though you are behind on your payments when you file. Under your Chapter 13 plan, you can pay off the arrearage (the defaulted payments) over the course of the plan, as long as you meet your current payment obligations during that time.
(To learn more about how Chapter 13 works, see our Chapter 13 Bankruptcy area.)
If you don’t want to keep property that is subject to a secured debt, you can surrender it to the creditor and schedule what you still owe on the contract as an unsecured debt. This means that you may have to pay a portion of the debt over the life of your plan.
Reducing Secured Debt to the Property’s Value (Cramdowns)
If you want to keep property that is worth less than what you still owe on it, you can propose a plan that pays off the replacement value of the property over the life of the plan (rather than what you owe on the contract). For example, if you owe $20,000 on the property and its replacement value is $10,000, you can propose a plan that pays only $10,000. If you complete your plan, then you’ll own the property free and clear. This remedy of reducing a secured debt to the replacement value of the collateral is known as a “cramdown,” a most descriptive term.
You can’t cram down a mortgage owned on your residence. Nor can you cram down a debt you owe on your car if you purchased the car for your personal use during the 30-month period before you filed for bankruptcy. If you use the car as part of your business, for example, you can cram down the debt without regard to the 30-month restriction. You also can’t cram down a secured debt on other personal property you purchased within one year preceding your bankruptcy filing.
The purpose of these restrictions is to prevent people from purchasing cars or other property with the intent to file for bankruptcy and use the cramdown remedy.
To learn more about cramdowns, see Reducing Loans and Non-Residential mortgages in Chapter 13.
Continuing the Contract
If you want to continue the secured debt as before, all you have to do is provide in your proposed plan that you will remain current on the contract during the life of the plan. If you don’t complete your Chapter 13 plan, but are still making payments on the secured debt, you can either convert to Chapter 7 and use one of the remedies described in How Secured Debts Are Handled in Chapter 7 Bankruptcy, or continue making the payments outside of bankruptcy. If you are still in Chapter 13 and something happens to the collateral (for example, it is destroyed in an accident), it is usually possible to amend your plan and reschedule what you still owe as unsecured debt.