Chapter 13 Cramdowns and Real Estate

The recent economic downturn created, among many other problems, an abundance of people with many financed assets on which they were “underwater” or “upside down,” meaning that the outstanding balance on the loan was greater than the current value of the asset itself. One possible way to address assets upon which you are upside down may be a Chapter 13 bankruptcy. A Chapter 13 bankruptcy can offer debtors several major benefits, with one of the most substantial being the “cramdown“. A cramdown is a process through which you can lower the amount you owe on certain secured debts. Specifically, in a cramdown, you can lower the amount you owe on a loan to the amount of the asset that secures it.

You can cram down many, but not all, of your secured assets. One major asset that is ineligible for cramdown is your primary residence. While your home mortgage is not eligible for cramdown, you can use this option on any other real estate asset you own, such as mortgaged commercial or rental properties.

In a mortgage cramdown, you remain obligated to your mortgage lender for the amount of the property’s value. The difference between the value of the property and the loan balance on the mortgage becomes unsecured debt and the bankruptcy court will deal with that unsecured debt as it would the rest of your unsecured debts, such as credit cards, with your bankruptcy discharge likely eliminating a substantial portion of that debt. As an example, say you purchased a condo for $750,000 for use as an investment rental property, financing $675,000 of that amount. Then the value of the property plummeted to $500,000, while you still owed $650,000. In a Chapter 13 cramdown, you could convert the $150,000 to unsecured debt (most of which will probably be discharged), leaving you owing your mortgage lender only $500,000.

In addition to lowering your outstanding mortgage loan balance, cramdown may offer additional advantages. The bankruptcy court will set the interest rate you will pay your mortgage lender. This percentage is often only slightly above the prime rate, and may be lower than the current rate your lender receives.

The challenge of using a cramdown on an investment property is that the court will require you to pay your mortgage lender in full by the end of your repayment plan, which probably run somewhere between 36 and 60 months. This likely sets you up for large monthly plan payments, or a big balloon payment at the end. Keep in mind that the court will only approve a repayment plan with a balloon payment if you can demonstrate that you will have the financial ability to make that payment when it comes due.

Holding financed assets upon which you are upside down can be a difficult, agonizing challenge. There are many options, but one possible way out is through Chapter 13 bankruptcy. To get careful, personalized advice about the best method for handling your debts, contact the Bay Area bankruptcy attorneys at the Law Offices of Melanie Tavare. Oakland bankruptcy attorney Melanie Tavare can help you weigh your choices in and out of bankruptcy, and explain to you the advantages and obligations of each path. Call (510) 255-4646 for your free consultation today.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code