Debt Ceilings Make Chapter 13 Cram-Downs Difficult To Accomplish

People get excited about the prospect of cramming down mortgages on investment properties in a Chapter 13 bankruptcy. I received at least two calls this past week from people interested in using Chapter 13 to both strip a second mortgage on their homestead and reduce the mortgage balance on at least one rental property.

Sounds like a plan, but unfortunately the plan usually does not work because of Chapter 13 bankruptcy’s unsecured debt ceiling. You cannot file Chapter 13 bankruptcy if your total unsecured debt exceeds about $330,000. Most courts, including the Orlando bankruptcy court, considers as part of the unsecured debt load, the total amount of stripped-off second mortgages on the debtor’s homestead as well as amounts crammed down (“reduced”, “wiped clean”) on the debtor’s investment property mortgages. You also have to watch out for the secured debt ceiling of approximately $1.1 million.

The debtor seeking to cram down or strip mortgages in Chapter 13 has to navigate the two debt ceilings in designing a Chapter 13 plan. The debtor has some control over the valuation of his properties when he proposes a Chapter 13 plan and mortgage reduction. The Chapter 13 debtor sometimes has to adjust his proposed property values so that he does not create too much additional unsecured debt by mortgage reduction, but that he also reduces the secured part of his mortgages to get below the secured debt ceiling.

If you cannot make it in Chapter 13 your other alternatives are to walk away from all the properties in a Chapter 7 or to file a more complicated and much more expensive Chapter 11 bankruptcy which has not debt ceilings.