chapter 13

Most people are optimistic about their future including most of my clients who file Chapter 13 bankruptcy. People believe, or hope, that bankruptcy’s protection will lead them to increase their future salary or business profits. A common question is whether a Chapter 13 debtor’s increased future income will make their Chapter 13 plan payment increase.

Chapter 13 debtors can cram-down mortgages on investment property to the amount of the property’s fair market value. People considering Chapter 13 to remedy upside down investment properties often ask how the cram-down works. Their questions cover issues such as when the cram down is final, does Chapter 13 affect their interest rate, and how does Chapter 13 cram-down deal with arrearage of past due payment on the investment property mortgage.

Here are some general answers to these common cram-down questions.

Chapter 13 permits debtors to “cram down”, or reduce, the amount of a mortgage on investment property to the property’s current market value. A client recently asked me if the Chapter 13 cram down eliminates past-due mortgage payments and if the “cram down” can include a reduction of the mortgage interest rate in addition to the mortgage balance.

My experience is that a Chapter 13 plan will not eliminate past-due payments but can add the arrearage to the loan balance after cram-down.

Because of substantial decline in Florida real estate values Chapter 13 bankruptcy is commonly used to strip off second and third mortgages from the debtor’s upside down  primary residence. Junior mortgages are not stripped off the residence at start of the Chapter 13. If that were the case then homeowners could file the Chapter 13 to wipe out the junior mortgage and quit payments soon thereafter. No, debtor’s junior mortgages are stripped at the “back end”, that is, at the end of the Chapter 13.

My last post discussed a bankruptcy seminar which promoted  advantages of court ordered mediation in the context of a Chapter 13 bankruptcy. Here are a some additional interesting points I heard from various seminar speakers (in no particular order)

• Your mortgage servicer makes more money when your mortgage goes into default. Maybe this is one reason why your mortgage services insists that you be at least 90 days late before they will discuss short sales or modifications;