A mortgage cramdown occurs through a bankruptcy process that strips the loan into two different sections with the secured loan acquired and the principle that is the same as the value of the property. The other section is the unsecured loan that has a principle for the rest of the mortgage originally taken for the house or commercial property.
What Is a Mortgage Cramdown?
A cramdown is not traditionally supported by the United States laws regarding bankruptcy. However, when they do exist and are permissible, cramdowns reduce the principle amount of the loan or change the rate of interest. Other terms may change during the cramming of the mortgage. This usually affects the creditors more than the homeowner, but the process generally occurs through Chapter 13 bankruptcies where the individual still has some assets remaining and must pay to reduce and remove other debts. The person with the bankruptcy often keeps a house, car and other property, but he or she must proceed through three to five years on a payment plan with the agency.
Compensation for Risk
The cramdown of the mortgage may move the unsecured debt lower in payment that may not occur for years or at all. If this loan falls off the credit, the homeowner may have fewer payments with the mortgage. The principle of the loan may change with payments necessary for the full three to five years of the Chapter 13 bankruptcy process. Working with an agent on the payment plan, the homeowner may still retain the house after the principle is taken care of during the period of up to five years. Additionally, with the mortgage taken care of, the value of the property may not change overall.
The Change on Existing Loans
The cramdown may change the principle and remove the second unsecured part of the loan to the point that the creditor does not receive this money. The change in the existing loans could cause problems until the money drops off the credit or the bankruptcy matter finalizes for the Chapter 13 three to five-year process. Part of the greater problem with the cramming is that this situation does not help the economy even if the homeowner may still retain the property after the Chapter 13 completes. Additionally, the cramdown and subsequent bankruptcy takes time and is not an easy fix for the individual.
During the process, the judge will issue the bankruptcy agency to hand over all income to the creditors that is available. This occurs for the entire three to five years to take care of as many of the debts as possible. One reason only up to 25 percent of individuals go through Chapter 13 is that the liquidation that occurs in Chapter 7 usually provides more funds to the creditors. With the cramdown, the homeowner has some breathing room with lesser payments to the mortgage company. With additional debts sanctioned off to the lesser importance in repayment, the person going through bankruptcy may have fewer problems in paying back all creditors during the three to five years.
The Cramming and the Bankruptcy
It is possible for a homeowner to save his or her property through a cramdown process when it is valid in the state. This is something he or she may need to broach with the bankruptcy agent assigned to the case for the three to five years necessary to complete repayment of debts. If the agent is aware of what a cramdown is, he or she may need to explain it to the homeowner. Then, pursuing the matter will depend on if the state legislature approved the process for homeowners going through a Chapter 13 bankruptcy process. With fewer repayment amounts necessary for each mortgage expense, this could give the homeowner the ability to redirect funds to other important matters.
When a successful Chapter 13 is possible rather than converting the bankruptcy to a Chapter 7, the cramdown may occur with the approved procedure in the state. It is imperative that the homeowner is able to pursue a valid Chapter 13 without the repayment plan failing, otherwise, he or she is worse off with the bankruptcy than if avoiding the Chapter 13 initially.
The Bankruptcy Lawyer and the Cramdown
It is important to contact a bankruptcy lawyer to determine if a cramdown is possible and if a Chapter 13 is appropriate for the estate. His or her advice and counsel may provide the best opportunity to progress forward.
Provided by HG.org