One of the benefits of bankruptcy is the chapter 13 bankruptcy mortgage cramdown. A chapter 13 bankruptcy mortgage “cramdown” allows debtor to propose a chapter 13 plan that reduces the debt on your home or investment property to the actual fair market value of the property and reduce the interest rate. For example, if you owe $200,000 on your mortgage but the properties’ fair market value is $125,000, you can cramdown your mortgage on the property to $125,000 and reduce your debt to the bank. While cramdowns are a very valuable tool in chapter 13 bankruptcy they are not without limitations and you must meet certain criteria to cramdown a loan:
- You cannot cramdown a first mortgage on your homestead property. You can, however, cramdown or even strip a second mortgage completely if your home is worth less than the value of the first and second mortgage combined. For example, if you owe $250,000 on your first mortgage and $100,000 on your second but your home is only work $200,00 you can strip your second mortgage completely, considering it an unsecured debt but you will still be required to pay your first mortgage; even though your home is worth less than the first mortgage.
- You can cramdown a first mortgage on a commercial, investment or rental property.
- If you cram down a mortgage you must pay the entire balance of the remaining mortgage during the chapter 13 plan period. This means that if you have $100,000 remaining on a crammed down mortgage and you propose a 60 month (5 year) chapter 13 plan, you must pay the entire $100,000 off within 5 years; plus interest (typically the prime rate plus one) and the trustee’s 10% administration fee. Doing so would require you pay approximately $1,911 per month to the holder of the crammed down mortgage. The crammed down mortgage cannot survive the chapter 13 bankruptcy.
- You must be able to show the court that you have sufficient income to make monthly payments that will pay off the property, as well as any other secured debt on property you wish to keep and the liquidation value of your unsecured non-exempt assets.
- You are not eligible for a chapter 13 cramdown if you have had another bankruptcy dismissed, whether voluntary or by the court, within 6 months of filing the chapter 13 petition.
If you have questions regarding bankruptcy or the chapter 13 bankruptcy cramdown, please contact Jacksonville’s debt relief attorney, Matthew C. Bothwell, Esq. We are here to help.