I get complaints that some of my blog pictures
are, well, crude, so in lieu of a crude bankruptcy
cramdown picture, I selected a nice one of me.
There are lots of what we lawyers call “terms of art” in bankruptcy, or whatever field of practice applies.
In bankruptcy, a cramdown is paying a secured creditor the value of the collateral, the security, with interest, but the rest is an unsecured claim, included with the other unsecured creditors, like credit cards and medical bills.
This can be done in Chapter 7 bankruptcy only by what is called redeeming, which is paying the entire secured claim at once.
Bankruptcy cramdown applies in Chapter 13 and Chapter 11 bankruptcy payment plans.
For example, your car is worth $5,000, but you owe $10,000. The finance company has a secured claim for $5,000, which you can pay over time in your plan, with interest. The $5,000 balance goes into the unsecured class of creditors, and shares in whatever money that class gets in your plan.
There is a catch in Chapter 13 that the car debt must be older than 910 days.
The basic rule in bankruptcy is that claims are split, secured only up to the value of the collateral.
If you and the creditor disagree on that value, the court will decide after an evidentiary hearing.
The other exception besides the 910 day car rule is, that you cannot cramdown the first mortgage on your principal residence.
This prevented a much more fair and orderly unwinding of the real estate bubble collapse ten years ago, but, you can search the blog for my rants on that topic.
Cramdown on Residence?
So, no matter how much your home is worth, you cannot cramdown that first mortgage.
(Except in Chapter 12 for farmers and fishermen)
IF the only collateral for that loan is your residence.
If your residence and other property are collateral, then you can cram down the first mortgage.
Maybe you live in a duplex, and you rent the other half. Or have a home and a cottage securing the same debt.
There are still issues, like paying off the secured debt within the 5 year maximum a Chapter 13 bankruptcy case is allowed.
Some Ohio bankruptcy courts have stretched the limits on this, allowing bankruptcy cramdown on the first mortgage on a principal residence.
In Re Stevens, Case 14-41709, in the Northern District of Ohio with Judge Kay Woods (Youngstown). Adversary case 14-41709 styled as Daniel E. Stevens, Jr. v. SunTrust Mortgage, Inc. was filed and SunTrust promptly filed a motion to dismiss the case based on violation of 11 USC §1322(b)(2). In a surprising opinion in response to the motion, Judge Woods indicated that the mortgage took more than just an interest in the property and therefore, the protection of 11 USC §1322(b) (2) did not apply. This additional property was the pledge for escrow funds found in the mortgage. The position caused great alarm among creditors’ attorneys as most standard mortgage forms in Ohio contain the escrow provision cited in Judge Woods’ opinion. This case was settled rather than litigated, but the Judge’s opinion clearly laid out her position and has been discussed aggressively by debtors’ attorneys in Ohio as a way to get a Chapter 13 cram down provision on a primary residence.
Unfortunately, I agree with the creditor attorney who wrote the above piece, and I think the creditor will ultimately win on this issue.