Section 506 of the US Bankruptcy Code allows for certain secured debts to be altered based on the value of the underlying collateral. This is referred to as “cramming down” or “stripping off” a secured loan. An example of using 506 to “cram down” a loan would be where the debtor has a car they purchased for $15,000.00. However, at the time of filing, the fair market value of the car is only $10,000.00. They still owe $12,000.00 on the car. Under the 506 cram down, the secured part of the debt is only $10,000.00 and the rest is treated as unsecured in the Chapter 13 plan. For a car, this can only be done on vehicles purchased more than 910 days (about 2.5 years) prior to the bankruptcy petition is filed. On other secured items, there is no such limitation with the exception of real property.
There no longer is an ability to “cram down” a debt voluntarily secured against your home. This is where “lien stripping” comes into play. If your home is now only worth $150,000.00 and your first mortgaged loan payoff is $155,000.00, then any other debt secured against the house is considered to be wholly “under water”. So if there is a second mortgage such as a home equity line of credit, that is completely “under water” in terms of equity in you home, then under 506 it can be treated as wholly unsecured through the plan.
If there are any general questions or topics you would like to read about relating to bankruptcy law in the Eastern Pennsylvania region, you may contact the Bankruptcy Lawyers at Sadek Law Offices, LLC at 215-545-0008 or 610-432-3111 or email brad@sadek-cooper-site. Thank you.