Those who are struggling to make payments on a loan or other large debts may be considering bankruptcy as an option. Chapter 13 of the U.S. Bankruptcy Code allows individuals with a regular income to reorganize their debts and establish a repayment plan over three to five years. One of the most appealing aspects of this type of bankruptcy is that it allows for cramdowns, which can reduce the amounts of certain types of loans and save debtors money.

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a type of bankruptcy filing that allows people to keep their assets and pay off their debts over time. Unlike Chapter 7, which eliminates most unsecured debts entirely, Chapter 13 requires debtors to repay their creditors over the course of three to five years. However, the amount a debtor will be required to repay can be significantly less than what was originally owed due to “cramdown” provisions in the law.

What Are Cramdowns?

A cramdown is a provision in Chapter 13 bankruptcy that reduces the amount of secured debt owed on certain loans. A secured debt is one that is backed by collateral. For example, in an auto loan, the vehicle a debtor purchased is the collateral, and if the debtor defaults on the loan, the lender will have the right to repossess the vehicle. With a cramdown, the amount of the loan is reduced to match the market value of the collateral. This means that if a debtor owes more than what the car is worth, a cramdown can provide some relief by reducing the amount that the debtor will be required to pay to the lender over the remainder of the loan.

Many Americans struggle with debts and other financial problems, and if they have been unable to make some mortgage payments, they may fear that they will lose their homes to foreclosure. The COVID-19 pandemic has placed many people in positions of financial uncertainty, but while a moratorium on foreclosures has been implemented to protect people who are struggling, those who have defaulted on their mortgage may face the potential loss of their home in the future. If you are in this position, you may be able to address your past-due mortgage payments and avoid foreclosure by filing for Chapter 13 bankruptcy.

Debt Reorganization Through Chapter 13

By filing for bankruptcy, you can halt the foreclosure process and prevent a creditor from selling your home or having you evicted. In a Chapter 13 bankruptcy, you will propose a repayment plan in which you will pay off your outstanding debts over a period of three to five years. This repayment plan may include unsecured debts, as well as payments of secured debts (such as a mortgage or car loan) that are in “arrears,” meaning that they were not paid on time and are still owed.

Once you complete your Chapter 13 repayment plan, any unsecured debts that have not been fully paid off will be discharged, and you will no longer owe any money to those creditors. Secured debts typically cannot be discharged without the creditor repossessing the property secured by the debt. However, the amount of your arrears can be included in your repayment plan, allowing you to pay off the past-due amount over time. If you continue making ongoing mortgage payments throughout your repayment plan, you will become current on your payments once the plan is complete, and you will be able to maintain ownership of your home.