On Monday, I talked about using a Chapter 13 bankruptcy to cram down a car loan. However, debtors are also able to cram down mortgages on real estate as well, for property not used as the principle residence. Again, the cramdown is used for debtors who now owe more on a loan than the property is worth.
As I said, the cramdown only applies to mortgages that are not the debtor’s primary residence. Many people buy real estate as an investment, and in recent years, it is far from uncommon for many of these investors to find that the value of the property has plummeted to far less than what they originally paid for the property. Similar to the car loan cramdown, a mortgage cramdown allows debtors to pay back what their properties are worth now rather than what they owe on the loan. And also like cramming down a car loan, the mortgage cramdown will possibly lower the debtor’s interest rate, possibly to even lower than the original rate on the mortgage.
Another potentially enormous benefit to cramming down a non-residential mortgage through a Chapter 13 bankruptcy is that the debtor will no longer be liable for any deficiency balance. Because a cramdown will make that amount unsecured debt, this means that the debtor will no longer be liable if the property happens to be foreclosed on later.
It should be noted, however, that non-residential mortgage cramdowns are not easily approved. Because a debtor will be required to pay off the balance of his or her crammed down mortgage within the three to five years of the Chapter 13 repayment plan, this either means that the regular payment plans will be much larger or the debtor will have to add one large payment on to the end of his or her plan to pay off that mortgage balance. This is easier said than done, as it can be difficult for a debtor to prove that he or she will be able to make that one large payment in the future.
Again, cramming down a mortgage can only be done with properties that are not your principle residence. Additionally, courts might not allow you to keep properties in which you do not reside unless they are your source of income. If you are looking to deal with a residential mortgage in a Chapter 13 bankruptcy, you will have to turn to a process called lien stripping, and I will discuss how that works on Friday.
Law Firm of Kevin D. Judd – Maryland bankruptcy lawyer