Bankruptcy Questions Answered

Chapter 13 Debtor Wants To Cram Down Several Investment Mortgages

Debtors in Chapter 13 bankruptcy cannot cram down or force a reduction in the balance of a first mortgage on their principal residence. Debtors can cram down first mortgages on all real estate other than their residence. Cram down means that the Chapter 13 bankruptcy will reduce the principal mortgage balance to the property’s current market value, and the mortgage debt above market value will be treated as an unsecured debt.

One of my new bankruptcy clients owns seven rental properties. All the rental properties are upside down, but all are currently rented and producing income. Most investors today are walking away from investment properties and filing Chapter 7 bankruptcy, if necessary, to protect themselves from commercial mortgage liability. This client wants to file Chapter 13, cram down the rental property mortgages to fair value, and keep all the properties. He says he needs to keep the properties because he uses the rental income to pay normal living expenses. The debtor is not otherwise employed and has no other source of income. Will it work?

In this case, the Chapter 13 cram down of multiple mortgages may work because these properties are this debtor’s primary source of income.. Where a Chapter 13 debtor uses his available cash flow to pay mortgages on investment properties there is that much less money available to pay other unsecured creditors. All debt not repaid to the general creditors will be wiped out at the end of the bankruptcy.

When a Chapter 13 debtor is employed and maintains rental properties as an investment the properties are not essential to the maintenance of the debtor and his family. The bankruptcy trustee will usually object to the such debtor’s cram down on multiple investment mortgages on the basis that the debtor’s cash flow is funding the multiple investment loans instead of the debtor’s general unsecured creditors. Debtors in Chapter 13 should not finance discretionary investments unless they pay back 100% of their other creditors. Where, as in this case, the debtor’s primary business is the maintenance or renovation of rental real estate the trustee is more likely to accept the plan because the investments are required for the debtor’s support