In a Chapter 13 bankruptcy, secured and unsecured loans are treated differently.  In a Chapter 13 bankruptcy, secured debts (i.e., loans with a security interest, such as a loan on a house, car, boat, trailer, etc.) are treated in different ways.

In some circumstances, a debtor will not have to pay the full loan balance of the asset in question, such as a car, boat, or piece of investment real estate.  In these circumstances, a debtor would only have to pay what the the collateral is worth, not what is owed on it (unless, of course, what is owed is less than the value of the collateral).  

But to do this, certain requirements need to be met.  One of these is that the loan securing the collateral should have been taken out at least 910 days before the filing of the bankruptcy.  For example, suppose a debtor has a car that is only worth $8000 (under either Kelly Blue Book or NADA valuations), but the loan on the car is $14,000?  Suppose also that this loan was taken out more than 910 days (about 2.5 years) before the filing of the bankruptcy.  In the Chapter 13 plan, the loan on the vehicle would only have to be paid to $8000, not the fully $14,000.  In addition, a debtor can often modify the interest rate on the debt.  The debt is said to be “crammed down”.

Needless to say, this can be a huge advantage for Chapter 13 debtors.  Like much else in the law, the details make all the difference.

How is the collateral valued?

What interest rate is to be used?

Does the “crammed down” debt need to be paid in full during the plan?

The answers to these questions can vary from jurisdiction to jurisdiction, and even from Chapter 13 plan to Chapter 13 plan.  Each plan is unique.  This is why it is so important to consult with an attorney who practices in your jurisdiction and who has experience in this complicated area of the law.

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