As you know, a key point of President Obama’s Real Estate Recovery Plan unveiled last February was the proposal to allow Bankruptcy Court judges to reduced the principal balance on home mortgages (ie: cram-down”) to current market value.  To the cheers of upside-down homeowners and the jeers of the banking industry, the proposal was quickly brought up in the House of Representatives and was passed in mid-March with a close vote along party lines. Then it was off to the Senate where a vote was expected by Easter. It was not to be.

The banking industry found a much more receptive ear in the Senate.  The Bill’s sponsor, Sen. Richard Durbin (D-IL) fought hard for passage arguing that this was necessary to avoid a wave of future foreclosures. The banking industry countered that allowing the courts to interfere with a mortgage contract would create greater risk in the economy, deter investors, make loans harder to get, and ultimately hurt future homeowners.  The bankers bolstered their lobbying with 12,450 letters to Senators from its members and flooding their inboxed with e-mails.  In the end, pressure swayed enough moderate Democrats to join with the Republicans and defeat the Bill 51-45.  Sentator Durbin plans to continue advocating a cram-down bill in the Senate but for now it is dead. Meanwhile, the hundreds of thousands of foreclosures that have been holding off for this Bill will now likely go forward.

If you are burdened by an over-encumbered property that you no longer can afford, be sure to get competent legal advice on your rights and strategies to minimalize or possible eliminate your exposure to a financial judgment and debt forgiveness taxes.  If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/

Much has been written since President Obama proposed giving Chapter 13 Bankrupcty Judges the power to “cram-down” home loans to current market value. Leglislation to do this passed the House of Representatives in March and is now stalled in the Senate.  The general impression in the marketplace has been that, other than for consumer debt such as boats and cars, cram-down was not available.  That might not be true.

Yesterday we wrote about how a little known legal filing under Bankruptcy Code 11 USC Section 506(a) may result in a cram-down of investment property valuation. This “506(a) Motion” as it has come to be called is used as part of a Chapter 13 Repayment Plan to do the consumer debt cram-down but most recently has found favor in reducing certain loans, particularly junior deeds of trust on investment property. See yesterday’s article for more.

An additional Code Section governing Chapter 13 Bankruptcies appears to also open the door for personal residence cram-downs when the loan must be paid off in a short time, such as a 5 year balloon loan. Under 11 USC Section 1322(c)(2), when the last payment of a loan’s original payment schedule for a loan secured only by the debtor’s principle residence is due before the date on which the final payment of the Ch 13 Plan is due, the Plan may provide for modification of the amount the lender claims is owed.  While this will not apply to everyone, anyone with a short term (ie: 5 years or less) payoff date on their loan needs to know about this.

If you or anyone you know is facing loss of their investment property or personal residence, make sure that they are getting competent and comprehensive legal advice that enables them to know where they stand and to formulate strategies to minimalize their risks and hopefully keep their property.

If you think that these cram-down Motions will benefit you in coping with your upside down properties, seek the advice of competent legal counsel as soon as possible to determine if you - and your property - qualify for this treatment.  If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/

Much talk has been made recently about President Obama’s proposed “cram down” provision that would allow bankruptcy judges in Chapter 13 case reduce the principal owed on mortgage loan secured by a debtors principal residence. While the bill seems to have stalled in the Senate, another provision of the bankruptcy code may be particularly interesting to individuals finding themselves struggling to make their payments on vacation or investment properties. Under 11 USC 506, a person filing for bankruptcy under Chapter 13 can in fact “cram down” the amount owed on certain types of property to the current market value. This of course depends on the nature of the property we are dealing with.

While the provision is most commonly linked to consumer purchases, for example, an automobile, household appliances or even furniture that are bought on credit and those goods in turn secure the repayment of the credit extended, the provision also applies to mortgages other than acquisition loans on a principal residence.

Essentially the way this provision works is that the debtor can file a 506(a) motion to revalue the collateral (secured by in most cases a Deed of Trust) and seek to reduce the security to the market value at the time of the filing of the petition so as to prevent the property from being oversecured, ie, securing more debt than the value of the property. What this motion seeks to do is to bifurcate the security (split it into two parts). If the court grants the revaluation of the property, the Creditor retains a secured interests in the property only to the extent of the value of the collateral. In the situation where the value is less than the amount owed on the mortgage, that portion of the mortgage that exceeds the value of the property then becomes an unsecured debt and leaves the creditor standing in line with the rest of the unsecured creditors, seeking a pro rata share of the monthly trustee payments.

In essence the way this plays out most frequently is when a debtor purchases a second property, they can not secure financing for the entire balance of the unpaid purchase price. So the either entice a second bank to give them a smaller loan in second position (which during the housing boom, banks were entirely to eager to accommodate) or the seller would carry back a note and deed of trust in second position securing the balance of the purchase price. The debtor then finds themselves upside down on the property and struggling to make payments. So they file a Chapter 13 bankruptcy petition to reorganize their debt. At the time they file their repayment plan they also file a 506 motion to revalue the collateral. The property they bought two years ago for $400,000 which is secured by a First Deed of Trust in the amount of $340,000 and a Second Deed of Trust in the amount $60,000 is now valued at $350,000. The Court can under the bankruptcy code bifurcate the status of the Second Deed of Trust, by treating $10,000 as secured (value of the collateral = to amounts owed 340,000 on first deed of trust plus $10,000 owed on the second deed of trust) and the remaining $50,000 owed on the Second Deed of Trust then becomes unsecured.

While the provision has historically been utilized to cram down payments on personal property, most commonly automobiles, the courts are allowing qualified debtors to cram down certain mortgages. See generally In Re: Latimer, 395 B.R. 304 (Bankr.W.D.N.Y. 2008) (cram down of a second mortgage held by State Farm Bank); In re: Paschen, 296 F.3d 1203, (11^th Cir. 2002) and In Re: Eubanks, 219 B.R. 468 (6^th Cir. BAP 1998). All of these cases also involve other sections of the bankruptcy code that deal with cram down provisions currently contained in the code. But that is a whole different article.

If you think that a Section 506 Motion will benefit you in coping with your upside down investment or second home properties, seek the advice of competent bankruptcy counsel as soon as possible to determine if you - and your property - qualify for this treatment.

If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/