However, you will be happy and surprised to learn that a Chapter 13 Bankruptcy might present some very unique opportunities for you that you were not previously aware of. For those of you facing financial difficulties while owning an investment property you do not want to lose, a Chapter 13 Bankruptcy might be the perfect solution for you.

You will be happy to know that under Title 11 of the United States Bankruptcy Code, Section 1322(b)(1), you can cram down a mortgage on an investment property. Cram down essentially means that if your mortgage is more than the fair market value of your investment property, then you can lower the principle balance of your mortgage to match the fair market value or secured value of the property. Basically, you can modify the mortgage’s contract by changing the principal balance, interest rate, and term. AND… the creditor cannot object to it.

For example, if the principle balance on your investment property mortgage is $200,000, but the fair market value of the property is only $100,000, you can “cram down” the principle balance of the mortgage to $100,000.

BUT…this option is not available for a mortgage on a principle residence or homestead property. Section 1322(b)(1) of the Bankruptcy Code specifically states that “may modify the right of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence…” The apparent reasoning by the legislators is that special protections should be given to Lenders who provide mortgages for a principle residence because they are providing an essential service.

There is nevertheless one other major limitation to being able to cram down a mortgage on an investment property. Many courts require that the mortgage is paid off by the time you complete your Chapter 13 Plan, which is within either three or five years. This translates into very high Chapter 13 Plan payments that can be very difficult to afford and keep up with.

Being able to cram down a mortgage on an investment property is not the only type of cram down offered through a Chapter 13 Bankruptcy. You can cram down most debts that are secured by property such as an auto loan.

If you have an investment property and wondering if a Chapter 13 Bankruptcy might help you save it, or have another secured debt that you would like to cram down through a Chapter 13 Bankruptcy, contact the Law Office of David M. Goldman, PLLC today for more information. Set up a consultation today so that an attorney can help you determine what your best option might be.

So how does an asset qualify for a cram down? First, the debt must be a secured loan. A debt is a secured loan when a lender has a security interest in the asset or collateral. This interest grants the lender certain rights to the asset, such as the right of repossession of the item if the debtor defaults on his or her payments. The most common type of security interests are found in cars and houses.

A cram down can occur when a person declares a Chapter 13 Bankruptcy. Unlike a Chapter 7 Bankruptcy, this type of bankruptcy requires that the debtor pays back his or her debts through a repayment program, which lasts 3 to 5 years.   It is important to note that a person’s homestead property does not qualify for this benefit.

Most often cram downs are used on car loans. The best way to explain how this process works is to show through an example. In this situation, the debtor has a vehicle that is worth $9,000 but the loan balance remaining is $16,000. By declaring a Chapter 13 Bankruptcy, the owner of the car can cram down the loan balance to be equal to the car’s value, or in this case $9,000. The difference of the loan value before the cram down and after, in this example, is $7,000, will then be lumped in with the debtor’s other unsecured debts. This means the debtor will only pay a small portion of the crammed down value with the other unsecured debts on his or her repayment plan, and the remainder will be wiped out once the repayment plan is completed.

Other Benefits of a Cram Down

Another great benefit to cramming down debts is that it may allow a debtor to reduce his or her interest rate and to prolong payments over a longer period of time. This means cramming down debts can lower a person’s monthly payments. The interest rate that a debtor pays after he or she declares Chapter 13 Bankruptcy is determined by the bankruptcy court and will often times be lower than the original interest rate. Since the repayment plan lasts 3 to 5 years, the payments may then be lower since if they are being stretched out over a longer period of time.

Restrictions

There are some restrictions on when a cram down can occur. For cars, Congress passed what is commonly referred to as the 910-day rule. This rule states that if a person wants to cram down a car loan, the vehicle must have been acquired by the debtor more than 910 days prior to declaring bankruptcy. 910 days is about 2 ½ years, which for most people isn’t a problem. Cars depreciate value immediately after they are purchased, so this law was enacted to prevent people from abusing the system and immediately trying to cram down car loans right after the purchase. The other big rule to take note of is the one year rule for personal property such as furniture or household goods. This rule states that personal property must be owned for one full year before its loan value may be crammed down.

For more information on how your assets can be crammed down through a Chapter 13 Bankruptcy, call The Law Office of David Goldman, PLLC today to speak with an attorney.

A secured debt is one that is backed by collateral. This means that if you don’t pay the debt, the creditor can repossess something, typically a car or house, to help pay what is owed. If the collateral is sold for less than what is owed, the debtor must pay the difference. This is called a deficiency.

Unsecured debt doesn’t have collateral like secured debt. It’s security is the creditor’s ability to damage the debtor’s credit. This includes items like, medical bills, signature loans and most credit cards. Occasionally, a credit card will attempt to collateralize the item purchased using the card, such as furniture or jewelry.

11 USC 722 allows a bankruptcy debtor to pay the secured portion of the debt owed on the car to satisfy the lien. “Security” for a loan the physical asset which can be exchanged to satisfy a lien. A typical security is a house or car. If you stop paying on the lien, the lender can take the house or car to satisfy the lien amount. Any value in the house or car above and beyond what is required to satisfy the lien (and associated fees) is returned to the borrower. A “Deficiency” occurs when the house or car sell for less than the lien amount. Deficiencies are unsecured debts for which a lender may sue. Deficiencies are very typical in the housing market these days.

When a debtor elects to use 11 USC 722, the court bifurcates the lender’s single claim into two claims, one secured which is equal to the fair market value of the car and one unsecured which represents the remainder. This way the borrower can discharge the unsecured portion, pay the secured portion and keep the vehicle. This is relatively easy in a Chapter 13 because the debtor can re-amortize the secured debt to be paid over the length of the Chapter 13 repayment plan, typically over five years. However, in Chapter 7 the payoff must occur immediately which is often impossible for people who’re already bankrupt.

A home mortgage is essentially a contract. You promise to make payments according to the contract’s terms, and the lender promises to transfer the home’s title to you when you finish making your payments. The government regulates these contracts by creating laws that set out procedures for things like foreclosures. Of course, there is still an element of free contract which allows lenders and borrowers to negotiate the terms of their agreement at any time. The government is limited in how much they are allowed to interfere with contracts so instead of trying to force banks to offer mortgage modifications, they make programs like HAMP, which offers lenders tax deductions or other benefits to make deals with borrowers. Personally, I think that the government isn’t offering the lenders enough in benefits because banks aren’t particularly helpful in getting borrowers into the program. HAMP mods are done in-house by the banks and “can” lower a borrowers mortgage payments to 31% of their gross income if you qualify. But what if you don’t qualify, and what if your payments are already below 31% of your gross income?

This is where lenders will begin the foreclosure process. They may offer you a so called, “in house modification”, but offer or no, the foreclosure process will continue until either you are somehow successful in obtaining an in-house modification or your home is sold on the courthouse steps. This is because the judiciary can’t force a bank to modify your loan. Honestly negotiated terms that were created in accordance with the laws can’t usually be modified by the government due to our rights to free contract as citizens. That being said, a recent program out of Orlando creates an opportunity for people facing Jacksonville bankruptcies and foreclosures.

Ideally, the payment on the vehicle is based on the predicted future value of the car. If the car costs $10,000 today and will only be worth $2,000 in eight years, your payments over the eight years need to add up to $8,000 to keep the value balanced to the payments (I left interest out to make it less complicated). However, in some instances where the buyer’s credit is good the seller can offer the vehicle at a lower monthly payment despite knowing that the vehicle will be worth less than is owed on it. This is called negative equity. Eventually, that vehicle dies and the buyer is forced to purchase another car, still owing on the first. Instead of having a buyer who is unable to make two car payments, the new financing company offers to pay off the first car and roll the debt from it over into the new car’s note. Over time this vehicle gets more and more underwater and eventually the debtor is forced to file bankruptcy.

A “Cram-Down” occurs when a debtor asks the court to determine the value of their vehicle and to make this value the secured amount of the debt. i.e. if the debtor owes $10,000 on a vehicle, but it is now only worth $2,000, the court can lower the secured amount owed to $2,000. The remaining $8,000 becomes unsecured. This can be done in both a Chapter 7 or a Chapter 13 bankruptcy. However in a Chapter 7 the $2,000 has to be paid immediately, so it is less practical than in Chapter 13 where the debtor has several years over which to make payment.

An article in the Financial Times says “the move brings to end a nearly decade-long effort to avoid Chapter 11. In 2003, American chose to avoid bankruptcy, while its rivals used the process to shed their pension plans and reduce structural costs, leaving it at a substantial disadvantage.”

The company’s CEO, Gerard Arpey, was not in favor of the company filing for bankruptcy. In fact, he had spoken out several times saying that he did not want AMR to file for bankruptcy. So he retired. Tom Horton, previously the company’s president, will now step in as the new CEO.

Redemption is an attractive choice for debtors because it allows them to pay what a secured asset is worth instead of what they owe on it. There can be a significant savings here as vehicles plummet in value as soon as they roll of the car lot. However, there are two conditions precedent that often get in the way.

First, if the car is being used for personal consumer use, the date of purchase (or refinance), must be longer than 910 days before filing the bankruptcy to redeem. If the car was purchased for business use, there is no waiting period. The second, and more difficult issue, is that the money to pay for the vehicle’s value must be paid for at the time of redemption. This is a problem because the debtors are bankrupt and rarely have enough cash to meet the payoff amount.

As a result, it’s no surprise that Trailer Bridge, a local trucking and shipping company, filed for Chapter 11 bankruptcy reorganization yesterday. Truckers have been hit hard by the economic downturn and several of them are seeking loan modifications on their trucks. In a Chapter 13 reorganization, the secured amount owed on a truck can be reduced to what it’s fair market value is on the date of filing rather than what the driver actually owes in the contract. This method is called, “Redemption“. The loan new amount is also re-amortized to five years so that the driver leaves the bankruptcy owning the vehicle free and clear.

If you would like to learn more about “Redeeming” a vehicle, contact a Jacksonville Bankruptcy Attorney or call us at (904) 685-1200 to schedule a free initial consultation.

1. The first reason to file for bankruptcy is to stop a foreclosure sale. Filing for bankruptcy immediately stops a halts a foreclosure suit against you. This can give you time to reorganize your finances, try to sell your home, negotiate a modification, or find another place to live. Your chapter 13 Plan can let you catch up on your arrearages over a 5-year time span and so cure your default. If your home has been foreclosed upon, bankruptcy might be a good option for you.

2. Filing for bankruptcy not only stops a foreclosure suit, it halts almost all legal actions taken against you, such as a garnishment or auto repossession. If your auto is in danger of being repossessed, filing for bankruptcy will keep the creditor from doing so. You can value your auto in the bankruptcy and pay only fair market value to the creditor. This means that if you owe $20,000 on your auto and it is only worth $10,000. you can pay the $10,000 to the creditor through your bankruptcy and own the vehicle outright after your Plan is completed.