Sometimes debtors hear the term “bifurcation” in New York bankruptcy, and they ask what it is, hoping it will help them. Although the term sounds sophisticated, it’s actually something that’s routinely associated with chapter 13: cram-downs. It’s a topic I’ve discussed before, but here I’ll synthesize everything in one place.
In a sense “bifurcation” does a better job of explaining what a cram-down is than that term does. The “bi-” part means two, and “furcate” means to fork or divide, so it’s legalese for dividing something into two parts, in this case a debt. Specifically, bifurcation means asking the court to take a debt on a secured asset and separate the secured amount from the unsecured part. Obviously, in this context the debt is greater than the market value of the collateral; in other words, it’s underwater.
In chapter 13, when debtors successfully bifurcate a debt, they are promising to pay the secured portion of it and then lump the remaining portion with the rest of their unsecured debts. In New York bankruptcy this means they will need to dedicate some of their plan payments to their unsecured debts, but most of the unpaid portion will be discharged.
Chapter 13 allows debtors to bifurcate or cram down many types of debts, just not the one kind that would probably benefit them the most—their homes. In particular, debtors cannot cram down first mortgages secured only by their principal residences, which is frequently what they would prefer to do. So strict is the requirement that in a case in which a New York bankruptcy court recently prohibited a lien-stripping of a debtor’s duplex, the court also declined to bifurcate the debtor’s mortgage on the duplex even though she wasn’t living in the full property.
However, there are multiple similar debts that don’t fit that definition. For example, debtors can bifurcate mortgages on their principal residences if they’re secured with other collateral, whether by themselves or in addition to the principal residences. In an interesting exception, section 1322(c)(2) of the Bankruptcy Code permits debtors to cram down mortgages on their primary residences if their final payments will occur before the end of their repayment plans.
Beyond the one non-trivial case of mortgages on primary residences, debtors can bifurcate just about anything else, so long as they were purchased more than a year before filing. The most common examples are their cars, which are subject to a longer, 910-day limitation period before filing. However, they can also bifurcate junior mortgages on their principal residences, even if they’re not underwater. Debtors can also cram-down any other type of mortgage: investment properties, second homes, boats, etc. (Click to read about how New York chapter 13 cram downs are possible for investment properties.)
Bifurcations or cram downs are one of the most powerful tools in chapter 13 bankruptcy, but using them requires sophistication. If you are experiencing financial difficulties, then talking to an experienced New York bankruptcy lawyer is much wiser than trying to go about bankruptcy alone.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.