Use Bankruptcy to “Cramdown” a Mortgage on Investment Property

Since the great recession, property values have plummeted leaving many properties underwater, whereby the mortgage or mortgages on the property are greater than the value of the property. Under 11 U.S.C. 506(a) and 11 U.S.C. 1322, you can cramdown the mortgage, or mortgages, to the value of the property under certain conditions, meaning that you can “cramdown” or reduce the mortgage to whatever the value of the property is. As an example, if your property is worth $120,000.00 and you owe $200,000.00 on your mortgage, you can cramdown, or reduce the mortgage to the $120,000.00 value of the property. The balance of the mortgage that is not crammed down will be discharged along with your other unsecured debt upon completion of the Chapter 13 Plan.

First, the property cannot be your primary residence, it must be an investment property.

Second, you cannot cramdown the mortgage in a Chapter 7 bankruptcy. The owner, or owners, of the property must file a Chapter 13 bankruptcy to cramdown the mortgage, therefore the owner, or owners, must be eligible to file a Chapter 13 bankruptcy.

Third, the cramdown portion of the mortgage must be paid in full through the Chapter 13 Plan with interest, meaning that if your property is worth $120,000.00, then you must pay this amount at what is called the Till interest rate (usually prime plus 2%), over the Chapter 13 Plan. Therefore, once you are finished paying the Chapter 13 Plan, you will have a property that is mortgage free.

There are many considerations that will determine if a mortgage cramdown is feasible for an investment property and only an experienced bankruptcy attorney will be able to advise you properly.

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