When a debtor submits a Chapter 13 bankruptcy petition, he is actually submitting a plan of how he would pay all his secured loans. Generally, people who file for bankruptcy are not able to entirely pay off all these loans. In such a situation, they can take advantage of the ‘cram down’ provision.
When a debtor wants to ‘cram down’, he can submit a request to the bankruptcy trustee. If it is granted, his pending loan amounts get adjusted. The principal amount will be based on the current market value of the collateral. This would surely reduce his debt to a great extent. The trustee may also allow pending interest to be adjusted and this would be calculated as 3% added to the prime rate.
Boat loans, car loans and motorcycle loans can be crammed down under Chapter 13. While mortgage on one’s main home does not qualify, mortgage on one’s second home is allowed. The condition is that the outstanding loan amount (that includes only the principal) should exceed the current market value of the collateral. The provision is called ‘cram down’ as it pushes down the value of the outstanding loan.
For instance, if the pending amount of a boat loan is $10,000 without taking the interest into account, and the current market value of the boat is $7000, cramming down reduces the loan by $3000. The debtor can use this to pay his unsecured creditors.
So if a person has taken a boat loan and Chapter 13 bankruptcy has been filed, he can reduce his boat loan amount considerably and also have money to pay other creditors by cramming down. Though the lender of the boat loan will lose some money, it may help unsecured creditors to recover at least part of their loan money.