The Short Answer
Yes, in some cases bankruptcy can lower your mortgage on a non-residential piece of property — but only through a Chapter 13 "cramdown," and only under specific conditions. The property cannot be your primary residence, and you must owe more on the mortgage than the property is currently worth (meaning you're upside down). If those two conditions are met, a Chapter 13 plan can reduce your mortgage principal down to the property's current market value, with the court setting a new interest rate. The remaining balance becomes unsecured debt — and in many Chapter 13 cases, you'll pay back only a fraction of that unsecured amount.
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.
Key Takeaways
- A cramdown is only available in Chapter 13 — not Chapter 7 — and cannot be used on your primary residence.
- The mortgage principal is reduced to the property's current market value, and the bankruptcy court sets a new, often lower, interest rate.
- The difference between what you owed and the crammed-down value becomes unsecured debt, treated like credit cards or medical bills in your Chapter 13 plan.
- Many clients pay back less than 20% of their total unsecured debt in Chapter 13, which means a significant portion of that leftover mortgage balance can be discharged.
- The biggest trade-off is that you must pay off the entire new mortgage balance within your Chapter 13 plan — typically 60 months or less — which can result in higher monthly plan payments.
- A cramdown works best when the gap between the property's value and what you owe is large enough that the payment restructuring makes financial sense over the plan period.
Attorney Insight
The cramdown strategy genuinely surprises people — not because they didn't know it existed, but because they assumed it worked on their home. I have to explain regularly that federal bankruptcy law specifically carves out your primary residence from cramdown protection, so if you're hoping to reduce the mortgage on the house you live in, Chapter 13 can't do that. Where I see cramdowns make a real difference is with rental properties and commercial real estate that have dropped sharply in value — situations where the client is locked into a mortgage that's $50,000 to $100,000 above what the property is worth. The catch most people don't see coming is that accelerated payoff requirement: cramming down a $150,000 balance sounds great until you realize you're paying it off in 60 months inside your plan, which can push monthly payments higher than clients expect.
