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All Parties Must Join to Cram Down Mortgages on Investment Properties

One of the rare benefits of filing a chapter 13 New York bankruptcy is the ability to reduce (“cram down”) the balance of an underwater mortgage on an investment property to its current market value. More commonly, debtors in chapter 13 cram down their cars, as discussed here. Cram-downs are not available for debtors’ principal residences. Instead, they can use chapter 13 to strip the lien from an underwater junior mortgage that was discharged in chapter 7. The amount crammed-down is discharged at the end of the case.

Debtors owning multiple real-estate properties can use the cram-down power if they propose in their repayment plans to repay the remaining balances within the time of the repayment plan, three to five years. The Bankruptcy Code authorizes cram-downs in Section 1322(b)(2). Interestingly, the rule could be extended to second homes, as discussed here, but it’s unlikely that a debtor would be able to afford a cram down on a second home if he or she were not renting it out.

Of interest, though, is whether a co-owner to a property can cram down a mortgage on an investment property. This situation emerged in Florida, but undoubtedly a New York bankruptcy court would rule the same way. A husband filed chapter 7 bankruptcy and received his discharge, but his wife also did so subsequently in chapter 13. The husband didn’t join as there was no benefit for him, but the wife tried to cram down the mortgage on an investment property they co-owned. The lender fought the cram-down, arguing that the husband needed to join the bankruptcy and be eligible for the discharge. The bankruptcy court sided with the lender, and the opinion can be found here (pdf).

The situation this couple faced is unusual but it highlights the need for good bankruptcy planning. For one, a bankruptcy court will not allow a cram down of an underwater mortgage on an investment property unless all the owners are participating in the bankruptcy. Moreover, all the owners must be eligible to receive a discharge. For chapter 7 debtors, the window is eight years. Lesson number two is that when multiple bankruptcies are in the cards, it’s crucial to plan them in advance and recognize the consequences.

My practice handles complex cases involving investment properties and can help you evaluate the best option for resolving financial problems.

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 bankruptcy lawyers near me for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA
718-855-6840
http://nybankruptcy.net/

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