What is a cram down in chapter 13 bankruptcy?

You’re planning to file for bankruptcy and you remember that a friend mentioned something about a rental property cramdown? What does it mean? There two types of bankruptcy an individual can file. A Chapter 7 or Chapter 13 bankruptcy. Under Chapter 7, the court seizes some of your assets and use it to pay your creditors. However if you want to retain your house and only want help in making the monthly payments somewhat affordable, then a Chapter 13 bankruptcy is your solution.

Under the chapter 13 bankruptcy laws, rental houses and even apartments, are considered as investment property. As such they are considered separate from your primary home. This is where rental property cramdown comes in. What Chapter 13 does is “cram down” debts you owe to these property to the fair value in the market. What it means is that your payments are readjusted so that it shows the current value of the property you are renting.

It is called as “cram down” because you are in effect forcing your creditors to lessen the amount of the debt since the market value of the property is lowered. Suppose you bought a property for $100,000 three years ago and it is now valued at $50,000. A rental property cramdown allows you to force your creditors to accept the $50,000 value. Needless to say this is all legal since a court has to approve the cram down before it can be implemented. This is one of the good features that a Chapter 13 bankruptcy offers.