REAL PROPERTY AND VEHICLE CRAM DOWNS IN BANKRUPTCY
Often times debtors owe more on their property than it is worth. When this is the situation, debtors have some choices that their attorney will offer or recommend, which may include a cram down.
A cram down is when the lien (loan) balance is “crammed down” to the value of the property, so that any amount due above and beyond the value of the property is eliminated, and the debtor(s) continue making payments on the new adjusted balance.
CRAM DOWN AVAILABILITY
Cram downs are typically only approved as part of a Chapter 13 Plan, however, the debtor(s)’ attorney can propose anything they want to in the bankruptcy petition, including cram downs, in a Chapter 7.
If the attorney proposes a cram down in a Chapter 7 filing and the creditor or trustee objects, the attorney and debtor(s) have the opportunity to answer the objection and try to get the court to allow it, but again, this is not typical.
Attorneys and creditors can also negotiate a Reaffirmation Agreement which “reset” the loan at the new lower balance when a debtor is filing a Chapter 7, which has the same basic outcome for the debtor(s).
REAL PROPERTY CRAM DOWN EXAMPLE
The debtors own a house that is worth $300,000. It is in a declining area, so the value has dropped significantly from a previous value of $400,000 but they want to keep the house so that they can stay close to family and keep their kids in the same schools
There are two mortgages (two liens) on the property:
- First Mortgage Balance: $275,000
- Second Mortgage Balance: $50,000
In this example, the debtors owe a total of $325,000 on their house; $25,000 more for their than its current value of $300,000. A cram down could cram the balance of the second mortgage down by $25,000, so that the debtors would only owe what the house is worth.
So for the house, the second mortgage claim amount (balance) would be reduced by $25,000 so that the combined loan-to-value (CLTV), or the combined amount of the two mortgages equals the current market value of $300,000 for the house.
As in the example above, cram downs do not typically apply to first mortgages. If the debtor(s) owe more for their real property than it is worth and there is only one lien (one mortgage), the debtor(s) would likely need to work with the lien holder (the mortgage company) to try to obtain a loan modification to “reset” their mortgage to an amount equal to the present value.
Cram downs that cram the mortgage down so much that it results in creating equity in the property for the debtor(s) will typically not be allowed.
When the attorney wants to do a cram down, he or she will instruct you as to what changes or adjustments need to be made in the bankruptcy petition.
VEHICLE CRAM DOWN EXAMPLE
Getting upside-down in a vehicle and owing more than it’s worth happens all of the time. Fortunately, a Chapter 13 bankruptcy debtor may be able to keep his or her vehicle and qualify for lower monthly payments.
For example, the debtors owe $20,000 for a vehicle that is only worth $10,000.
The attorney wants to propose a cram down of the lien on the car to reduce the loan balance to $10,000 and lower the debtors’ payments.
Disclaimer
713 Training representatives are not attorneys.
All information and training provided by 713 Training, regardless of the form it was provided, is for educational purposes only, is not legal advice, and is not intended to take the place of legal advice from a competent licensed attorney.
Neither the author or publisher of information provided by 713 Training assume any liability resulting from the use or misuse of information provided. The recipient of any information provided bears sole responsible for the use of any and all information provided.
Under no circumstances will any legal responsibility or liability be held against the author or publisher for any reparation, damages, or monetary loss due to the information provided, either directly or indirectly.
713 Training encourages that you seek competent legal advice from a licensed attorney before applying information, regardless of the source.
Who We Are
713 Training is your premier one-stop solution for bankruptcy petition training, for drafting the most highly-detailed, accurate and professional Chapter 7 and Chapter 13 bankruptcy petitions that trustees love!
We provide bankruptcy petition training to legal assistants, paralegals, virtual bankruptcy assistants (VBAs), bankruptcy petition preparers (BPPS), bankruptcy attorneys and law firms.
Contact Us today to discuss your goals, and how we can help you start or grow your legal career.
Ready to start earning income drafting bankruptcy petitions from home? See our online bankruptcy petition training courses at www.713training.com. You can also join our online community at www.navba.org.