There are many tools that can be used during the course of bankruptcy to ensure your protection and make things just a bit easier in the long run. Lien stripping and cram down are two examples of useful bankruptcy tools.
Lien stripping and cram down are used during Chapter 13 bankruptcy filings. They help you modify secured debts, such as car loans or mortgages, to make repayment of these loans more reasonable based on your Chapter 13 repayment plan. They are especially useful because people who file for bankruptcy are often “upside down” or “underwater” on loans, which means they owe more than the actual value of the property.
Most Chapter 13 repayment plans last three to five years. Secured debts are given priority and unsecured debts, such as credit cards and medical bills, come second and sometimes are not paid at all or are discharged at the end of the repayment plan. Reducing the amount paid on secured debts ensures they will be affordable during the repayment plan and increases the likelihood there will be additional money to put toward unsecured debts.
Cram downs involve the debtor converting a portion of the debt from secured to unsecured. The secured debt is crammed down to the value of the property, while the remaining amount becomes unsecured debt. So if someone filing for bankruptcy owes $300,000 on a mortgage on a home that is worth only $200,000, the $100,000 difference is converted to unsecured debt.
Cram down is not permitted on homes that serve as a primary residence or recent vehicle loans.
For more information on cram downs, check out this information from Fannie Mae.
The main problem with a cram down on investment property mortgages is that most courts will require the mortgage be paid in full during the three to five year bankruptcy plan. This creates an abnormally high payment that most debtors will not be able to afford. This can be solved by amortizing it over a longer period (such as 20 or 30 years) but providing for a balloon payment at the end of your three to five year bankruptcy plan.
In order to have this type of plan confirmed, the debtor will have to show they have the ability to make the balloon payment. This can be done by showing that debtor can sell other property to pay off the balloon payment balance by the end of the plan.
Lien stripping converts an entire debt from secured to unsecured. If a lien on a property is unsecured, it can be stripped off and made unsecured.
For example, if a homeowner has a first and second mortgage on his or her home, and there is also money owed on a judgment lien, and the second and third amounts surpass the value of the home, the second mortgage and lien are not secured. This allows the bankruptcy court to convert the second mortgage and lien to unsecured, which means the debt obligation becomes secondary in the Chapter 13 bankruptcy.
Both cram down and lien stripping allow you to preserve ownership in your property and reduce the amount you must pay through your Chapter 13 repayment plan, but they can be complicated processes. If you believe either would benefit you and your bankruptcy, it’s important to speak to an experienced attorney about your options.
For more information or to ask questions about how to pursue bankruptcy in your situation, contact the law office of Frank J. LaPerch, PC at 845.942.5500.