A Chapter 13 bankruptcy may allow you to reduce the principal balance of your investment property mortgage. This is known as a mortgage “cramdown.” Read on to learn how you can use Chapter 13 bankruptcy to cram down your investment property mortgage.
How Does an Investment Property Mortgage Cramdown Work?
In a Chapter 13 bankruptcy, you can reduce the balance of your investment property mortgage to the fair market value of the property. So if your property is worth less than the balance of your mortgage, you can pay your lender the value of the property through your Chapter 13 repayment plan and wipe out the remaining balance. For example, if you have a $300,000 mortgage on an investment property that has declined in value to $150,000, you would pay your mortgage lender only $150,000 instead of the entire $300,000.
What Happens To The Remainder Of My Mortgage Balance?
The remainder of your mortgage balance becomes unsecured debt and is paid through your Chapter 13 plan along with your other unsecured debt. Most Chapter 13 filers pay only a small portion of their unsecured debt through the plan; the remainder is discharged (wiped out) at the end of the bankruptcy. To learn more about the Chapter 13 plan and what percentage of your unsecured debt you must pay, see The Chapter 13 Repayment Plan topic area.
Do I Get Other Benefits by Reducing My Mortgage Through Bankruptcy?
Reducing and paying off the balance of your investment property mortgage through a Chapter 13 bankruptcy may allow you to reduce your interest rate as well. Also, since you are discharging your remaining balance, it ensures that your lender won’t be able to sue you for a deficiency balance in the future.
How Long Do I Have to Pay Off the Reduced Balance?
One limitation of cramming down your investment property mortgage through a Chapter 13 bankruptcy is that you will usually have to pay off the reduced balance by the time your bankruptcy is completed, which cannot be longer than five years.
To learn more about how mortgage cramdowns work, see Reducing Loans and Non-Residential Mortgages in Chapter 13 Bankruptcy.