In Chapter 13 cases, secured claims are handled in one of two basic ways. The first, which we call the “cure and maintain” method, requires your past due payments and future payments on secured debts to be paid from your monthly bankruptcy plan payments (“through the plan”). When the bankruptcy plan has terminated, you remain obligated to make any payments remaining due on these secured debts. The second method is known as a “strip-down/stretch-out/cram-down”. This method is particularly advantageous to our clients when the collateral is worth less than the amount of the debt, or alternatively when the number of payments left on a debt is less than the length of the plan. The following example illustrates the “strip-down/stretch-out/cram-down” method. Consider a high mileage car worth $4,000 with a $6,000 secured loan set to be repaid into thirty (30) remaining $233 monthly payments and an interest of rate 12.25%. Here, you can strip-down the creditor claim to the value of its collateral ($4,000), stretch-out the payments to thirty-six (36) months and pay the present value of the claim at a reduced interest rate (“cram-down”) such that the monthly car payments through the plan might be $127.20. The ability to “refinance” your secured loans through this second method lets you reduce the monthly payments to an affordable amount and is sometimes only way you have enough cash flow to keep all of your property.

 

The new bankruptcy laws impose limitations on a Chapter 13 debtor’s ability to strip down certain secured debts. For instance, if the collateral is a motor vehicle acquired for the debtor’s personal use and was incurred within 910 days (approximately 2.5 years) prior to bankruptcy filing and the debt is a purchase money debt, then the debt cannot be stripped down to the value of the vehicle. The prohibition of strip-downs applies to other collateral if the debt was incurred within one (1) year of the bankruptcy filing. Properly treating these “910-vehicle claims” is a very important aspect of your Chapter 13 plan. It this connection, it is important to know the following:

1. When you purchased the vehicle;
2. Whether you purchased it for personal or business use; and
3. Whether all of the debt relates to the purchase of the vehicle or whether some portion of the debt relates to paying off an old loan. Please bring a copy of your vehicle purchase agreement and loan when you come to consult with us.