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Bankruptcy and Cramdown Loans

 Posted on July 27,2021 in Debt Collection

Chicago Debt Collections LawyerOne of the most frustrating issues a creditor faces is when a customer stops paying their bills and their past due balance begins to accumulate despite the creditor’s attempts at collecting. That frustration can rise even more if the customer files for bankruptcy. When a person files for bankruptcy, the courts issue an injunction, referred to as an automatic stay, that halts all debt collection activity. Creditors who face this situation should speak to a Chicago debt collection attorney to find out what rights they have when it comes to collecting what the customer owes them.  

Bankruptcy Options

When an individual files for personal bankruptcy, they usually have two options, Chapter 7 or Chapter 13. A Chapter 7 bankruptcy is often recommended for people who do not own a home since it involves selling off any property the person has in order to pay off debts, although there are some exemptions to what type of property can be sold. It is often referred to as liquidation bankruptcy.

Chapter 13 bankruptcy provides bankruptcy filers the opportunity to restructure their debt, allowing them to keep their home and other property. It is usually the choice for people who have secured assets (home, vehicles, etc.). The court approves a repayment plan that allows the person to repay their debt over a period of three to five years. Once the repayment period is complete, any remaining debt is charged off.

Cramdown in Chapter 13

Although Chapter 13 bankruptcy gives a creditor some relief of obtaining the debt owed to them, depending on the size of the debt, there is always the risk that the balance owed may not be fully paid off within that repayment plan period and would be charged off. In addition, the creditor may suffer even more of a financial loss if the bankruptcy includes a cramdown of loans.

A cramdown is when the court allows the reduction of the balance that is owed on secured debt, such as furniture, vehicles, or any property that can be repossessed if the debtor does not pay. Cramdown cannot be used for the debtor’s mortgage on their primary residence, however, there are situations where it may be able to be used on mortgages for investment properties.

Cramming down a loan involves decreasing the amount to the actual value of the secured property. For example, if the debtor owes $15,000 on their vehicle loan, but the vehicle is actually only worth $7,000 (because of depreciation), the bankruptcy court would cram the amount the debtor now owes to the auto loan company as $7,000, leaving the creditor with a loss of $8,000. The court may also order the interest rate to be lowered. This amount is then paid over the repayment period and if there is still a balance that is charged off, this increases the creditor’s loss even more.   

Contact a Chicago Creditors Rights Attorney Today

The key to avoiding debt collection loss because of bankruptcy is to secure repayment plans with debtors or take the available legal steps before the debtor files for bankruptcy. Having a skilled Chicago debt collection lawyer who has extensive experience and knowledge in bankruptcy and debt collection laws is critical to protecting your company’s assets. Call Dimand Walinski Law Offices, P.C. at 312-704-0771 to schedule a consultation to find out how our company can help.




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