Chapter 13 Cram Down Of Investment Mortgage Unfair To Unsecured Cre...

Chapter 13 bankruptcy provides debtors the ability to cram down mortgages on their investment property provided that the investment mortgages be paid in full during the Chapter 13 plan. The cramdown opportunity is designed to help the debtors save their investment real estate as part of a reorganization, but the opportunity requires good faith and fairness to other creditors. 

I read about a bankruptcy case where the court denied a debtor’s proposed cramdown of investment property as being abusive and not in good faith. The joint debtors in this case owned two Florida properties. The lived in one property and rented out the second property. Just three days before they filed Chapter 13 bankruptcy they moved out of their homestead. Their bankruptcy petition listed the rental and the former homestead as investments. Their bankruptcy plan proposed cram downs of all mortgage on both the rental and the former homestead. Both properties had negative cash flow monthly so that the debtors were using disposable income to carry the mortgages. The debtors expected that the the real estate market will improve during their five year plan so that they could sell or refinance their real estate.

The court denied confirmation of the debtors’ Chapter 13 plan. That the debtors on the eve of bankruptcy try to  converted an upside down homestead with a first mortgage not eligible for cram down to an “investment property” colored their plan in an aura of bad faith. The court listed several more specific  reasons why the it believed the plan was not designed in good faith. The court’s main objection to confirmation was that the plan was unfair to unsecured creditors. The court  noted that because both properties had negative cash flow the debtors would have use a substantial part of their disposable income to sustain the mortgages of the two upside down properties. The dedication of disposable income to the mortgage would leave the debtors money to pay only 5 percent of their unsecured debts. The debtors are betting on future property appreciation with their unsecured creditors’ money. 

The case is a good example of a debtors attempting to overreach and take unfair advantage of bankruptcy.