When you are considering Chapter 13 bankruptcy, you may be able to reduce or “cram down” the principle balance of certain secured debts. The most common examples of secured debts are your mortgage or car loan. In a chapter 13 bankruptcy, you can cram down your car loan, investment property mortgages or other personal property such as furnishings or household goods to the actual value of the item making it easier to pay it off.
If you choose to cram down a car loan for example, an automobile that is worth $10K with a loan balance of $15K can be reduced to the value of the vehicle ($10K). The remaining balance ($5K) will be rolled into your unsecure debts, which are typically dischargeable. As an added benefit, you may be able to reduce your interest rate and stretch your payments out in order to tackle the newly reduced principle.
Of course, there are some cram down restrictions to keep in mind. If you wish to cram down your car loan, you must have purchased the car at least 910 days (approximately 2.5 years) prior to the bankruptcy. Items such as household goods require that the goods be purchased at least one year prior to the bankruptcy before a cram down is allowed. Mortgages on your principal place of residence are not eligible.