How To Lower What You Owe On Some Secured Property In Chapter 13 Bankruptcy
Let’s say that you take a mortgage out on property. Time goes by, and the property doesn’t appreciate as fast as you thought it would. Or there is an economic downturn, and the property decreases in value. Now, you owe more to the bank than the property is worth. The property is “upside down.”
Excess Amounts are Discharged
Normally, if you stop paying or you surrender the property, the property will be sold at foreclosure, and you will personally owe the difference in value—that is, the amount that you owe that was not satisfied from the proceeds of the sale. Because mortgages are huge loans, this can leave people with tens, or often hundreds of thousands of dollars in debt.
The good news for people who want to walk away from upside down property is that they can do so, and that financial obligation—the unsecured part of the loan, not paid by the foreclosure proceeds—will be wiped away and discharged.
Keeping Property, Lowering the Loans
But what if you want to keep your secured property? Can bankruptcy lower the amount of the loan to the value of the property, so you’re no longer upside down? In limited circumstances, and in Chapter 13 bankruptcy, you can do that. This is called a cramdown, and it applies to cars as well as houses.
Cramdown of Cars
There are some restrictions however. If you’re trying to cramdown a car, you must have bought the car about 2 and a half years before you filed your Chapter 13, assuming the car is used for you personally, and not in a business capacity. For all other personal property like furniture, you only need to have purchased the property one year prior to your bankruptcy filing.
Home and real estate loans don’t have a timing restriction, but they do have one big restriction: They don’t apply to your primary residence. Rental property, investment property, and commercial property can all be crammed down. Not your principal residence.
Paying Back Amounts in Your Plan
Another problem with the Chapter 13 cramdown with property is that courts will require that you pay the amount that is reduced back over the life of the plan. So, if you’ve lowered the mortgage by $50,000 to the value of the property, the $50,000 is unsecured debt that has to be paid back during the plan. This can make plan payments expensive, unwieldy, and, depending on your income, it can make the plan impossible for a court to approve.
With car loans, where the cramdown may only be a few thousand, the payback figure over the life of the plan may be much more affordable, and would allow you to keep your vehicle, in the event that you stand to lose it if you were to file a Chapter 7.