Cram Down of First Mortgage in Chapter 13 Bankruptcy

     I have posted before about the more common strategy of stripping completely unsecured second mortgages in Chapter 13 bankruptcies to treat them as unsecured debts with the positive results in many cases that little to none of this now unsecured debt needs to be paid by debtors through their Chapter 13 plans.  There is also the less common, but very beneficial option to cram down first mortgages in Chapter 13 when the facts support it. I will not try to get too technical with code cites and case law that supports it other than it is based on the interworkings of Sections 1322(c)(2) and 1325(a)(5) of the Bankruptcy Code and for Connecticut residents In Re Latimer, 395 B. R. 304 (Bankr. W. D. N. Y. 2008) a widely respected decision in the Second Circuit which Connecticut is a part of. The term "cram down" means reducing the total amount of the mortgage debt paid thru the Chapter 13 plan. This option is available to debtors whose first mortgage debt has either matured already or matures and is payable in full during the the three to five year term of their plan. The debtor may owe a first mortgage debt well in excess of the market value of their home and this option would let them reduce the total mortgage debt due to the value of their property to be established by an appraisal. This cram down will not work for all debtors since it will depend upon the value of their property and the ability of a particular debtor to payoff this debt in equal monthly installments over the term of their plan. For example, let's take homeowners who did a mortgage modification with a short term balloon payment coming due at maturity during their plan which together with the existing mortgage debt is well in excess of the value of their property:

       Regular Mortgage Debt: $200,000.00
       Balloon Payment:               75,000.00
       Total Due:                        $275,000.00
   
      Property Market Value: $150,000.00

      Mortgage Debt reduced by $125,000.00 to $150,000.00 by cram down motion

    $150,000.00  =  $2,500.00 monthly plan payment toward mortgage for 5 year plan
         60

     In this example the $125,000.00 reduction will be treated as unsecured debt so best case scenario is  a debtor who has enough  monthly income to pay the reduced mortgage debt thru their plan with little to nothing else left to pay unsecured creditors thereby discharging unsecured claims upon completion of their plan. Another point to keep in mind is that with this cram down plan the debtor is only making their plan payments to completely pay off the mortgage debt unlike the more common Chapter 13 plans where debtors make their plan payments toward the mortgage arrearages due at time of filing combined with their regular montlhy post-petition mortgage payments going forward outside of their plans. In summary, if you have an underwater property you want to try and keep with a mortgage maturity date coming due in close to 5 years the exploration of this cram down option with an experienced bankruptcy attorney in your area is advisable.

New Bill to Allow Bankruptcy Discharge of Student Loans Submitted to Congress

     H.R. 2366, the  Discharge Student loans in Bankruptcy Act was submitted by lead Congressman John Delaney (D-MD) this month. It is heralded as a bi-partisan effort, but only one republican John Katko(R-NY) has signed on so far as a co-sponsor. It is also an ambitious proposed amendment since it completely eliminates the subsection in 11 USC 523 referencing student loans as an exception to discharge. Therefore, no more need for proof of undue hardship or time limitations applied to discharge of student loans which will be treated like any other dischargeable debt. The ability to discharge student loans will be based on the existing limitation to qualify for discharge in Bankruptcy including the Chapter 7 means test for example. Also no distinction between federally insured  and private student loans which I anticipate will incur some blowback and possible changes if this amendment  even makes it way through Congress. The need for this amendment has been well documented in the press with the student loan crisis reaching epic proportions. The question is whether a Republican controlled Congress very much beholden to a strong bank lobby will approve it. This is especially true with regard to private student loans the biggest problem for debtors since unlike federal student loans there are no payment programs in place to provide any relief to debtors.
     It may take until 2018 with the possible control of the House and/or Senate being transferred to the Democrats. Also the undpredictability of the current occupant of the White House and how long he may stay there also will come into play. The need for reform is clearly there. Will this current government take the necessary action to address it is unclear at best. I encourage anyone concerned with this issue to reach out to their Congressperson to advocate for the passage of this amendment to bring the relief needed to those debtors suffering from the burden of excessive student loan debt. This crisis affects all of us not just these debtors since it a major drag on our economy and once these debtors especially young struggling adults are freed from this debt they will be able to start families, buy homes and related items to help grow our economy for the benefit of all.

Chapter 13 Bankruptcy or Mortgage Modification What is My Best Option?

            In a perfect world every delinquent homeowner borrower would receive a timely mortgage modification from their lender which neatly fits their current financial situation to save their home. Unfortunately many homeowners who have applied for mortgage modifications have found out that the process moves incredibly slowly especially with the major lenders with the most delinquent loans. Furthermore, when and if a mortgage modification is finally offered it does not offer the relief needed for them to keep their home for the long term. One of the problems is the size of the mortgage arrearage that has accrued during the drawn out mortgage modification process. With government programs like HAMP that  generally do not provide mortgage principal balance reduction the size of these arrearages can offset the effect of  the interest rate deduction and extension of maturity date on the new monthly mortgage payment being offered to homeowners. The problem is when the mortgage arrearage is added to the current principal balance this increase in the principal balance negates the potential reduction offered by the lowered interest rate and extended maturity date. The net result is the borrower being offered a new loan with a principal balance well in excess of the current value of their home with a slightly reduced new mortgage payment. This type of modified loan does not offer any real true benefit to a delinquent homeowner borrower. Therefore, before starting the mortgage modification process with a lender a borrower needs to find out the potential modification programs available for their loan and approval timelines if at all possible. The borrower than should next consult with a bankruptcy attorney to  determine if a Chapter 13 filing is a better option for them than pursuing what may turn out to be a dead end modification.

          The best candidate for a Chapter 13 is a debtor who has suffered a temporary income setback that caused their default, but has now returned to work and said default was not directly attributable to the terms of loan itself. That is it was not an 80/20 high interest loan combination, but instead a loan with a reasonable fixed rate of interest with a monthly payment that now that the borrower is working again is a reasonable amount to pay. The borrower must also have the current ability to pay the extra monthly amount required into a Chapter 13 plan to at least bring the mortgage arrearage current upon completion of the plan. This is an extremely important point. If a borrower does not have sufficient income to fund a plan than a mortgage modification with the necessary lowering of the mortgage payment, if attainable, is the only real option they can pursue to save their home.  However, a borrower who has the current ability to fund a Chapter 13 plan needs to make an important decision. Do they risk applying for a mortgage modification only to be rejected or offered an unacceptable modification and forgo their opportunity to file a Chapter 13 later due to the increase in the mortgage arrearage making it not feasible for them to fund a Chapter 13 plan.  Realistically I have not seen delinquent homeowner borrowers demonstrate the ability to set aside the necessary monthly mortgage payments while applying for a modification to offset the increase in the mortgage arrearage to keep their ability to file Chapter 13 viable. This decision of Chapter 13 versus mortgage modification needs to be made with the advice of bankruptcy counsel who can review the debtor's financials and provide them with a realistic opinion as to the feasibility and success of filing a Chapter 13. The advantage of a Chapter 13 bankruptcy versus a mortgage modification is that the only real party in interest you have to satisfy is the Chapter 13 trustee and the debtor is not subject to the whims of the mortgage lender. If the debtor has sufficient income to support their plan as determined by debtor's counsel and provided to the Chapter 13 trustee the plan will be confirmed. Additional benefits of a Chapter 13 include the possibility of discharging some or all of a debtor's unsecured debt dependent on their assets and income. If a plan is going to include the discharge of unsecured debt wholly unsecured second mortgages can be deemed unsecured by the plan as well judgment liens which impair a debtor's homestead exemption. I have written this blog article based on my experience with debtors over the past several years since the mortgage crisis first started who after one or more years of unsuccessful attempts to obtain a mortgage modification contacted me regarding Chapter 13 as an option only to be told it was no longer feasible due to the amount of their mortgage arrearage. It is my hope that any borrower who is not too delinquent and is weighing their options will consult with a bankruptcy attorney first before blindly applying for a mortgage modification so they can make an informed decision what option best fits their situation.