By Michael Goldstein, Esq.
A very powerful tool debtors have at their disposal should they find themselves in a bankruptcy situation is the ability to pay only the value of an asset. This is particularly enticing if you have a lien against secured property such as an automobile, mortgage on income property (but not on a residence) or piece of furniture that far exceeds the value of the property. The common term for this disparagement in value vs. loan is being, "upside down". In most cases, the value of secured property such as an automobile, boat, or furniture you are financing decreases more rapidly than the loan is being repaid.
For example, most debtors own much more on their car or truck then the value of the car or truck, should they try to sell it. Additionally, you may be able to lower the interest rate on your payments (though not on a mortgage). Many debtors have secured loans where they agreed to pay 18%-35% interest, and sometimes even more. In a Chapter 13 bankruptcy you only have to pay most secured debts at the prime rate plus 1-3%, depending on the circumstances of your case. A debtor in a chapter 13 bankruptcy has the ability to motion the bankruptcy court to lower the amount that you owe on nearly all secured debts to pay only the fair market value of that property and to discharge any amount in excess of that value.
The rub on this is that in most cases, you will be required to pay the entire present value of the secured property at a reduced interest rate, commonly referred to as "Till interest" (as a result of a Supreme Court case where one of the parties to the case was named Till). The relevant interest rate is the Prime Rate of Interest (which varies) plus a Risk Premium of 1% - 3%.
There are certain restrictions or limitations on cramming down a debt. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) places limitations on a Chapter 13 Debtor's ability to cram down when dealing with Purchase Money Security Interests ("PMSI"). This deals with the situation 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 an automobile acquired for personal use within 2 ½ (two and half) years prior to the Chapter 13 filing, the debt can not be crammed down to the value of the vehicle. However, if the collateral is not an automobile, the prohibition on strip down only applies if the PMSI debt was incurred within one (1) year prior to the bankruptcy filing.
As always, all situations in the state of Massachusetts relative to a strategy for bankruptcy, cramming down and lien stripping or any other type of legal debt relief, should be discussed in detail with a bankruptcy attorney acting in the capacity as a debt relief agency to understand all your avenues open to you and the legal ramifications of such.
Cramming Down Secured Property was drafted by Michael Goldstein of the Massachusetts Bankruptcy Law Office of Goldstein and Clegg
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