Orange County Lawyers Explain Cram Down/Strip Down Options for Collateral in New York
This option can be employed when the collateral is worth less than the amount owed (commonly referred to as “being upside down”) or when the number of payments left on the debt is less than the length of the Chapter 13 Plan. The interest rate being charged by the Secured Creditor can also be reduced in a Cram Down.
Example of Cram Down/Strip Down
To illustrate the operation of the various aspects of Cram Down, let us suppose that:
- A Debtor has a high interest car loan (i.e. 15%)
- He has 30 payments left at $400.00 per month
- The pay-off figure on the loan is $10,000.00.
- The vehicle is only worth $6,000.00, due to its age and mileage.
- The Debtor still wants to keep the vehicle.
In Chapter 13, a Debtor can:
- Strip Down the Secured Creditors Claim to the value of the Collateral (i.e. $6,000.00).
- Extend the payment term to 60 months (assuming a 60 month Plan is proposed).
- Pay the present value (i.e. $6,000.00) of the vehicle at a reduced interest rate, commonly referred to as “Till interest” (after a Supreme Court case where one of the litigants was named Till).
- The relevant interest rate is the Prime Rate of Interest (which varies) plus a Risk Premium of 1% – 3%.
For the sake of this example, let’s assume that the “Till interest” rate would be 8.5%.
- This Chapter 13 Debtor would have to pay in full only the present value of the vehicle (i.e. $6,000.00).
- Debtor pays the $6,000.00 over 60 months at an interest rate of 8.5%.
- The monthly car payment made through the Plan would only be $123.11 per month, resulting in a considerable savings to the Debtor.
- The “unsecured” portion of the outstanding loan (i.e. $4,000.00) would be paid as a general unsecured claim through your Plan, along with your credit cards, etc., usually for a fraction of the actual amount due.
This can result in a tremendous savings to a Debtor, and by effectively allowing you to “refinance” your car loan, you may be able to free up your cash flow and dramatically improve your financial position.
Limitations on Cram Down/Strip Down
The auto finance industry was not too pleased with the effect that Cram Down/Strip Down was having on their Secured Claims, and the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) now places limitations on a Chapter 13 Debtor’s ability to use this process when dealing with Purchase Money Security Interests (“PMSI”), (i.e. when the money borrowed was used to purchase the collateral, which is the standard scenario in a car loan).
If the collateral for a PMSI debt is a motor vehicle acquired for personal use within 910 days (approx. 2 & one-half years) prior to the Chapter 13 filing, the debt cannot be stripped down to the value of the vehicle.
If the collateral is not a motor vehicle, the prohibition on strip down only applies if the PMSI debt was incurred within one year prior to the bankruptcy filing.
Dealing with these “910 Vehicle Issues” can be very tricky— timing is everything.
It is also important to know if a portion of the car loan involved the paying off of an existing loan on a car you traded in, since this portion of the debt is not PMSI in nature, it can still be stripped down.
Cram Down/Strip Down and Mortgages
This Cram Down/Strip Down option only applies to personal property, and cannot be employed to reduce the Secured Claim of the holder of any first mortgage on your residence. However, if you have a second mortgage on your house, and the value of the residence is less than the balance due on the first mortgage, you can Strip Off the second mortgage and treat it as an unsecured claim. However, you can only do a second mortgage Strip Off if there is not one single dollar of house value to “secure” it, and you stay in your Chapter 13 until its completion.
Examples of Strip Down applied to a second mortgage
Two examples will illustrate how Strip Off can be applied to a $50,000.00 second mortgage/home equity loan on a $300,000.00 residence.
If the first mortgage has a balance due of $295,000.00, then the entire $50,000.00 second mortgage cannot be Stripped Off, because there is $5,000.00 worth of equity (i.e. $300,000.00 value minus $295,000.00 first mortgage equals $5,000.00 equity) for the second mortgage to attach to.
However, if the balance due on the first mortgage were $305,000.00, the entire $50,000.00 second mortgage could be Stripped Off, as there is no equity in the residence for it to attach to.
Obviously, if a Second (or Third) mortgage can be Stripped Off it can dramatically improve a Debtor’s Financial position as they would no longer have to make any payments to that second mortgage holder. In this instance the amount owed to the Second (or Third) mortgage holder would be treated as any other unsecured debt and repaid through the Plan payments made to your Chapter 13 Trustee, often resulting in the mortgage holder receiving only a fraction of the amount actually due.