Pay Its Fair-Market Value in 60 or Fewer Months through the Chapter 13 Payment Plan
A Chapter 13 bankruptcy is a highly useful form of bankruptcy if you own real estate that may be underwater due to the burden of a second mortgage or home equity line of credit or if you own real estate in addition to the home you actually live in. Rental properties which bring in income each month but for which you owe more than the property may be worth in real, fair-market value may be crammed down in a Chapter 13. That is, within the (maximum) 60-month term of a Chapter 13 bankruptcy payment plan, you can pay the holder of the mortgage on the property merely the value of the property—and totally discharge the remaining balance, requiring the mortgagee to remove its lien at the end of the Chapter 13. In other words, you can walk out of a Chapter 13 bankruptcy owning your money-making rental property free and clear.
Cramdown a Rental Property in Chapter 13 Bankruptcy: What Is Being "Crammed Down," Exactly?
The "cramdown" refers to the re-prioritization of the payment of the different types of debt in your Chapter 13 payment plan. In a Chapter 13 payment plan, your debts are paid in a priority order based upon the type of debt in question:
- Administrative expense of the Chapter 13 (your attorney's fees, Trustee's fees)
- Secured debt (mortgages, car payments, other debts with collateral "securing" them)
- Contracts/Leases being assumed
- "Priority" unsecured debt (debts with no collateral attached that the Bankruptcy Code has determined to be of priority importance above other unsecured debts. Child support arrearages is one example)
- Other, non-priority unsecured debt (credit cards, personal loans, medical bills, etc.)
Your mortgage payment, as you see, is normally paid as a secured debt near the top of this priority order. What you owe is determined by your mortgage note contract. However, the Bankruptcy Code defines "secured" differently than that there may simply be a mortgage and collateral involved. A secured debt is secured, practically speaking, only to the limit of the value of the collateral securing the debt. You can owe a million dollars on a loan note, but, if the only thing securing it is a ramshackle outhouse worth $13, good luck to the bank collecting its $1 million if you file a bankruptcy and discharge the note. If your rental property is worth less than you owe, you can "cram down" the amount you pay as a higher priority secured debt to what the property is actually worth. If you owe $100,000, but the property is only worth $50,000, you will pay $50,000 over 60 months—and then the other $50,000 is essentially re-classified and treated as last-in-priority, regular unsecured debt to be paid to the same extent that your other unsecured debts are paid and then the unpaid balance totally discharged.
How Does the Cramdown Happen?
Local practice will vary as to how the process of cramming down a rental property will actually occur, but, in the Eastern District of Michigan, the process begins simply by designating the secured debt for the rental property as to be crammed down/modified in the Chapter 13 plan itself, a document that your bankruptcy attorney prepares for you and files with your initial Chapter 13 bankruptcy petition. Before that happens, however, a good appraisal should be done of the property in question. This will cost generally around $300 as of the time of the writing of this blog post, but consider it money well spent and a basic cost of the benefit you will receive from the Chapter 13. The reason you need an appraisal is that, once the petition and plan are filed, you can expect the creditor holding the mortgage for the rental property to object. The cramdown is simply something you are entitled to under law, so, aside from minute issues not worth discussing in detail here, the only real issue for the creditor to object to is the amount of money you are cramming the priority secured debt down to. In other words, the value of the property. This potential dispute over the value of the home will need to be resolved before the court will confirm (approve) your Chapter 13 plan. You can expect to resolve it either via an evidentiary hearing before the judge in your case and/or through a settlement negotiation with the creditor in question. The creditor will want to appraise the house themselves, and the "battle of the dueling appraisals" will unfold from there, if there is a vast difference in the two valuation figures. Ultimately, however, with an experienced bankruptcy attorney at your side, you can expect that you will resolve the issue. The question for you will be at what amount, as the final valuation of the property will greatly affect the necessary size of your monthly Chapter 13 plan payment. Whatever amount you do pay as a high-priority secured debt for the home must be paid in no more than 60 months, the maximum length of a Chapter 13 plan.
Cramdown a Rental Property in Chapter 13 Bankruptcy: The Bottom Line
The bottom line when you cramdown a rental property in Chapter 13 bankruptcy is that you need to have a good bankruptcy lawyer working for you and that you should not expect to get something for nothing out of the Chapter 13 process. No one should attempt a Chapter 13 bankruptcy without an experienced bankruptcy attorney working for them. The odd Chapter 7 case ends up well on a "going it alone" basis, but, even in Chapter 7, a bankruptcy is a complex process that can end up an expensive mess without a skilled hand guiding it. There is no question that a Chapter 13 simply requires good counsel for a successful and cost-effective outcome. The question of navigating the "battle of the dueling appraisals" alone should convince you of the need for hiring a lawyer who knows how to negotiate such things with creditors—and who is very likely to be personally familiar with the "usual suspect" creditors' attorneys in the area. As for expecting something for nothing, this is a common phenomenon that The Hilla Law Firm gently suggests its potential clients disabuse themselves of. You stand to gain an enormous amount of financial benefit from a Chapter 13 involving a rental property cramdown, both in terms of the debt that will be out-and-out discharged and in terms of the maybe decades' worth of full equity ownership you stand to gain out of the rental property after the cramdown and after the Chapter 13. Don't quibble and kvetch about the $300 you will spend on the appraisal of the property or the attorney fees you will pay for the full valuation negotiation or litigation. It's simply going to be the cost of your Chapter 13. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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