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What is a rental property cramdown? How does it work in a chapter 13 bankruptcy case?
I own a rental property. Right now, I owe around $500,000 on the mortgage, but the state of the housing market is such that it’s only worth around $375,000. If I declare bankruptcy, will the debt be marketed down to market value?
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Answers
Cram down is a tool that the bankruptcy court has available to modify the amount owed on a secured debt—other than a mortgage or similar debt on a primary residence. It is available in Chapter 13 bankruptcies.
Remember, a secured debt is one in which property is used as collateral to secure a debt; if the debt isn’t paid, the creditor gets the property. In a Chapter 13 rental property cramdown, the secured debt e.g. mortgage on a rental, income, or investment property is reduced to the property’s market value, which is, after all, all the secured creditor could count on recovering if it had to foreclose.
The cramdown is available for any sort of secured debt other than for the primary residence. It’s most commonly used for vehicles (which quickly depreciate to be worth less than their loans), as well as income or investment properties where there’s been a market downtown (like all of 2009 and 2010 to date) and the property is worth less than the loan(s) on it.
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Posted by Steven Sweig on 21 Apr 2010
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