Yes, in some cases, you can lower your mortgage on a non-residential piece of property. In a Chapter 13 bankruptcy, clients can attempt to do what is known as a “cramdown” to lower their mortgage. A “cramdown” lowers the principal amount you owe on the mortgage, and then the bankruptcy court determines the interest rate of your new mortgage (often lower than many client’s current interest rate).
This technique can only be used if, first, the house is not your main residence but is, instead, some type of investment property. Secondly, the value of the house must be less than the amount you still owe on the mortgage. In other words, you must be upside down on the investment property. Only then, may a Chapter 13 bankruptcy “cramdown” the loan to make it equal to the current market value of the house.
So what happens to the amount that is crammed down? Let’s take a look.
If you initially owed $200,000 on the home and within the Chapter 13 bankruptcy the mortgage was crammed down to $150,000, the value of the property, then that $50,000 deficiency balance doesn’t just go away. Instead, the deficiency balance is converted into an unsecured debt. In a Chapter 13 bankruptcy the deficiency balance is treated the same as credit cards, medical bills and unsecured personal loans. That’s a good thing because within a Chapter 13 bankruptcy you will usually pay back some portion of the entire debt. In many cases clients will pay back less than 20% of the unsecured debt (although it varies in every case) which means in our example above $40,000 would be completely wiped out in your mortgage alone.
So what’s the catch? The biggest drawback of a “cramdown” is you have to pay off the new mortgage balance within the time frame of your Chapter 13 bankruptcy plan. This means you would have to pay off the entire mortgage balance within your 60 month (or less) Chapter 13 plan. This could mean you have fairly high Chapter 13 plan payments while within the bankruptcy.
If you are interested in learning more about how to “cramdown” a piece of non-residential property in a bankruptcy then be sure to contact an experienced bankruptcy lawyer in your area.