Investment Property "Cram Down" in Chapter 11 Bankruptcy

A "cram down" means to reduce the balance on your mortgage. This is an extremely valuable provision provided to individuals or business entities in Chapter 11 bankruptcy.

In Chapter 11, you and your bankruptcy attorney can use the cram down provision with investment properties.

Can You File For Chapter 11 Bankruptcy?

While most Chapter 11 cases are filed by businesses, individual people can and do file Chapter 11 too. Typically, these are people who have too much income to qualify for Chapter 7, but owe too much debt to qualify for Chapter 13. Questions? Feel free to call or contact us online.

How Chapter 11 Cram Down Works

Like in Chapter 13, an entity or individual who files Chapter 11 must propose a plan of reorganization, where certain debts can be reduced or eliminated, and contractual obligations are rearranged.

One advantage of Chapter 11, as in Chapter 13, is the debtor's right to "cram down," or reduce, the mortgage balance on investment properties.

While you cannot modify a mortgage secured just by your principal residence, mortgages on other types of properties can be modified.

  • Section 506(a) of the Code provides: An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.

In plain English, this means that a mortgage lender's claim is good only so far as the fair market value of the property; any balance in excess of fair market value is unsecured and therefore dischargeable in bankruptcy.

This is known as "bifurcation."

Since the Code allows a Chapter 11 debtor to modify the rights of creditors holding secured claims, a Chapter 11 plan can propose to reduce the balance of an unsecured mortgage on a property that is not the debtor's principal residence to its fair market value, and reduce or eliminate the unsecured balance.

Questions? Call the Cook County Bankruptcy Lawyers of Billbusters, Ledford, Wu & Borges, LLC

Call 1-888-542-1900 or send us an email. We are happy to help answer any of your questions, including the Chapter 11 cram down, and get you headed toward a fresh start.