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Reducing Loans and Non-Residential Mortgages in Chapter 13

Chapter 13 bankruptcy features an effective instrument known as “Chapter 13 Cramdown” for reducing the balance supposed to be paid on certain secured debts. Through the cramdown procedure, the debtor can reduce the balance of debt equal to the fair market value of the property. Generally, these cramdown processes are relevant in inverted car arrearage or vehicle debts and inverted mortgages on investment property. However, the debtor cannot cramdown the mortgage on a residential building used by the debtor as his/her principal residence.

A non-residential mortgage cramdown allows a debtor to trim down the principal balance of his/her mortgage to the value of the real estate asset. It can also be utilized to reduce the mortgage interest rate. Generally, Chapter 13 bankruptcy applies the cramdown process in investment property mortgages. Investment properties include rental or commercial properties.

In certain circumstances, the value of real estate assets may be severely reduced due to bad economic conditions, government policies, economic disadvantages or such other reasons. If a debtor mortgaged such an investment property and the mortgage balance is greater than the fair market value of that property, Chapter 13 cramdown provision enables him/her to reduce the mortgage balance equal to the value of the investment property. The remaining portion of the mortgage balance becomes part of unsecured debts. Sometimes, a small portion of such unsecured debts may be paid off through the repayment plan or the balance may discharge or even wiped out at the completion of the repayment plan.

As illustrated above, the mortgage cramdown has certain benefits. In Chapter 13 bankruptcy cramdown, the interest rate on the mortgage is determined by the bankruptcy court. Generally, it is fixed at merely above the prime interest rate and thereby the debtor can enjoy a lower rate in his/her mortgage note. Moreover, the foreclosure sale proceedings of the creditor will boost the mortgage balance with fees and other costs and if the debtor adopts the Chapter 13 bankruptcy cramdown, it automatically stops the foreclosure.


Inside Reducing Loans and Non-Residential Mortgages in Chapter 13