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/

In February, President Obama’s Homeowners Affordability and Stability Plan proposed altering the Bankruptcy Rules to allow Chapter 13 Judges to reduce (”cram-down”) the amount of debt owed as part of a repayment plan. By March 5th, the House of Representatives passed a Bill giving Ch 13BK Judges the authority to modify loans to “affordable” levels by lengthening terms, cutting interest rates and reducing mortgage balances of bankrupt homeowners. It also would permanently increase the FDIC’s coverage of bank deposits to $250,000. The measure passed the House 234-191 and went to the Senate (SB 61) where passage was expected by Easter.

Easter has now come and gone and passage is no closer. Lobbying from the banking industry has met a receptive audience in the Senate and the Bill’s sponsor, Richard Durbin, has backed off from his early strong support. Current negotiations propose limiting such authority to “subprime” loans but even that may go nowhere since Durbin has been unable to gather enough support to pass any such bill. Senator Charles Schumer suggested last week that he might seek to “tack-on” this bill to someother pending legislation to try to get a faster vote. However, many think that even if this watered down bill got through the Senate, the House would then reject it.

As it stands now, action is not likely to occur until after Memorial Day. Public comment remains split between consumer advocates who want relief now and those who say the correction must sun its course to fix the economy. Strong voices are being heard on both sides but not strong enough to put Bankruptcy cram down relief into law.

Stay tuned for further information. 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/

On March 5th, the House of Representatives gave a thumbs up to upsidedown homeownes by approving the Bankruptcy reform provision of President Obama’s Real Estate Recovery.  The provision would allow Chapter 13 Bankruptcy judges to “cram-down” loans to affordbale levels by lengthening terms, cutting interest rates and reducing mortgage balances of bankrupt homeowners. It also would permanently increase the FDIC’s coverage of bank deposits to $250,000. The measure passed the House 234-191 and now goes to the Senate.

Needless to say, the bankruptcy provision is opposed by the banking industry and most Republicans, who said it would further destabilize home prices. This makes passage by the Senate more uncertain. Everyone seems to agree that the bill is not perfect although there is a general concensus that something must be done to stem the wave of foreclosures.  Senate consideration will start next week and there is likely to be lots of pressure for revisions.  The bill passed the House narrowly and along party lines. Passage in the Senate will be more difficult.  Not mentioned in the many articles circulating will be just how the Bankruptcy Courts would handle the infux of potentially millions of new Bankruptcy filings. Certainly more staff would be needed and maybe even some expedited screeing process. Right now we’re at the big picture stage but, as with everything, “the devil is in the details”.

Stay tuned for further information. If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com

As you know from my past Articles, a key component of the Obama Real Estate Recovery Plan is getting Congress to approve allowing Bankruptcy Chapter 13 Judges to “cram down” principal amounts on over-encumbered homes to current market values. Congress is debating this as they have been for many months. But there may be some interim help while we wait.

Yesterday while I was in Court assisting a client in a Bankruptcy matter, a lawyer came in on another case and sought to oppose a lender’s request for Relief from Automatic Stay. When someone files Bankruptcy, the filing automatically stops any adverse legal action against the debtor without the BK court’s permission. This lender was seeking that permission so they could complete their foreclosure of the debtor’s home. This is routinely granted since the borrower has no equity.  This time however, the result was different.  The attorney did not have any legally valid reason to oppose the lender’s request. Instead, he asked the Judge to delay ruling on the Lender’s request until the impact of the Obama Plan can be known. The Lender’s attorney did not vigorously object and the Judge actually agreed to delay ruling for 6 weeks. That gives that borrower another month ans a half to stay in their home and provides added incentive for the Lender to agree to a modification. Plus, it is not guaranteed that the stay will be lifted in 6 weeks. The attorneys must come back to court at that point and make any further arguement as to why the Relief from Stay should or should not be granted.

If you are one of the millions out there facing foreclosure, this result in this Bankruptcy court may provide an extra margin of help if other judges are willing to rule the same way.  While I am not at all a fan of Bankruptcy, in certain cases it is a necessary and valuable tool to enable an upside down borrower to get back on their feet.  If you have any other real estate or legal questions, please feel free to contact me at sjbeede@bpelaw.com or through our website at www.bpelaw.com .