Saving Your Home: When can you cramdown a home loan?

It is an unusual circumstance, but occasionally I come across a home loan that can be crammed down in a Chapter 13. Cramming down a debt is a shorthand description of taking a debt that is secured against some sort of property and decreasing the amount that is secured down to the present day replacement value of that property. Debts can be secured against all sorts of property, but the two most common ones I see in consumer bankruptcies are votor vehicles and real estate. If there is a lienholder listed on the title of your car, then that indicates there is a debt owed which is linked to that car. Usually it is the money borrowed to buy the car, but not always. If you have a mortgage, then means your house is tied to a debt creating a secured debt.

Basically, a secured debt is a debt is where you personally owe the money and your property is also obligated to that debt. In bankruptcy, your personal obligation to repay the loan goes away, but you can almost never get rid of the obligation of the property to satisfy the debt. If you stop paying, then the property is taken to help satisfy (pay) the debt. When that happens with real estate, then a lawsuit is filed called a foreclosure (Kentucky law – some states vary the process). It is called a foreclosure because the plaintiff is asking that your interest in the property gets closed out so that only their interest remains. With a car, they just repossess the vehcle.

Cramming down a debt, then, tends to mirror what would happen outside of bankruptcy if the secured property is taken to satisfy the debt. So, if you go into a Chapter 13 owing $12,000 that is secured against a car that is worth only $8,000.00, then the secured debt gets lowered to $8,000.00 (subject to a 910 day time limitation). There is speicial rule for a debt owed on real estate which can be found in 11 USC Sect. 1322(b)(2). This special rule keeps the debtor from decreasing the principal owed now matter how little the house is worth.

This special rule is limited, though. First, the real property securing the debt must be the primary place where the debtor lives. So, if it is rental property, the rule does not prevent cramdown. Second, the loan must be secured solely against that residence. If the lender secured their loan against both your residence and against some other piece of property, then cramming down the debt is not barred.

The way I see this second condition falling through for the lender are in bridge loans where the debtor moved out of one place and into a new place they purchased. Then, when their first residence does not sell right away, then it just sits empoty or they convert it into rental property. The loan remains secured against the old property, but is also secured against the new place. This creates the circumstance where a bankruptcy lawyer can help you decide whether the values of the proeprty are such so as to cram down the loan and whether one of the properties should be surrendered in the bankruptcy.