Despite real estate market setbacks, there is help available. With the assistance of a qualified Los Angeles Chapter 13 Bankruptcy Attorney, outstanding loan balances can be “crammed down” to reflect the actual market value of a rental or other investment property.
How a Chapter 13 Bankruptcy Works
Chapter 13 bankruptcy involves a court-approved repayment plan to pay debts over a three to five year term. Debtors going through a Chapter 13 bankruptcy will make manageable installment payments based on their income. Upon the successful completion of the repayment plan, any remaining unsecured debt will be discharged.
Secured debt is debt that is tied to some form of collateral, such as a car. To keep this kind of item, you must complete your Chapter 13 plan. By extending payments on the principal balance over the life of a Chapter 13 plan, you may significantly ease your financial burden, often lowering your payments.
The only kind of secured debt you would not put into your plan would be the primary mortgage on your home. The primary mortgage on your homestead is not included within Chapter 13 plan because the length of the mortgage is generally far longer than the length of the plan. It simply would not be possible to pay off most mortgages within five years.
Cramming Down Investment Property Mortgages
The ability to cram down rental property debt is one of the many advantages of Chapter 13 bankruptcy in Los Angeles. If you owe more than your property is worth, the bankruptcy court may force your creditors to reduce the principle balance on your loan to reflect your property’s reasonable market value.
For instance, suppose you had a purchased an apartment complex several years ago. Currently, you owe $250,000 on the apartment mortgage. But, thanks to market fluctuations, the property is now only worth $150,000. In your Chapter 13 case, you can seek to cram down the security interest in your property to the present market value. Essentially, this means your outstanding mortgage amount will be reduced to $150,000. The remaining $100,000 will be added to your total unsecured debt. Because of how unsecured debt is treated under a Chapter 13 repayment plan, the vast majority of your installment payments will go toward secured debt (e.g., your investment property mortgage). Usually, only pennies on the dollar are allotted to unsecured debt in a repayment plan, and unsecured debt remaining at the end of your three to five year Chapter 13 term is completely discharged.
The bottom line: cramming down your underwater investment property mortgage can easily eliminate a large portion of your repayment obligations.
Eligibility for Cramming Down and A Few Caveats
In order to qualify for the investment property cram down, a few requirements must be met. Your attorney will need to convince the bankruptcy court that a cramming down is warranted based on your individual circumstances. There is no guarantee your investment property mortgage or mortgages will be crammed down.
To get court approval, the individual filing a Chapter 13 will need to show that the crammed down mortgage on the investment property can be paid off in full within five years. This is the most challenging aspect of the cram down provision. The Bankruptcy Code requires all secured debt besides a home mortgage be paid in full through the Chapter 13 plan.
Cram Down Not Available for Homestead
Finally, cramming down is only an option for investment properties, vacation properties or other types of real estate that do not qualify as your primary residence. Although there are many ways in which a Chapter 13 bankruptcy can help you meet loan obligations, such as eliminating a second and third mortgages through by lien stripping, a cram down on mortgage principle is not one of them.
If you own investment properties and find yourself struggling with debt, contact a bankruptcy attorney today to find out more about the best options for your particular circumstances. With the right help, you can be on the path to paying off your investment property mortgages at a fair balance, and, in turn, a brighter financial future.