2 Factors That Can Stymie Mortgage Cram-Downs on Investment Property
The majority of Las Vegas bankruptcies are in Chapter 7. This chapter allows debtors to liquidate their unsecured debts while retaining their secured ones. In most circumstances, petitioners are able to exclude their houses and cars from the bankruptcy estate via exemptions, which is why the chapter is so common given the assets and liabilities Americans typically have. In many occasions, though, people will want to file in Chapter 13. Why? Because that chapter allows people the option of “cramming-down” secured loans on cars and non-primary residences. This means the bankruptcy court orders a principal reduction on the properties. The problem is that this cannot always be accomplished so easily, and there are two reasons for it.
(1) Income Requirements. Although Chapter 7 has a means test, Chapter 13 requires debtors to have a minimum amount of disposable income to file or else they will be forced to Chapter 7. This amount is either all their disposable income for three years, or five years if debtors make more than the median income.
(2) Debt Limits. Chapter 13 applies two separate debt limits to those considering bankruptcy in that chapter. For unsecured debt, the number can’t be greater than $360,475, and secured debt must be less than $1,081,400. In the context of owners of investment property, they often have unsecured second mortgages on their primary residences, which count to the unsecured debt total. The amount they would like to cram-down on non-primary residences also counts to that total, so in some cases, the amount of unsecured debt petitioners have surpasses the $360,475 debt limit. If they own too much secured property—meant for investment or personal use—then they will also be ineligible.
There are three options for people in these circumstances. The first option is to try to either sell some of the properties or refinance others.
Obviously, debtors in these circumstances can file in a different chapter. In Chapter 7, debtors would have to lose the properties. Chapter 11 is another alternative as it has no debt limits, but it’s also more expensive.
Thirdly, even in Chapter 13, a debtor with investment property has some wiggle room over how the properties are valued. One could try to balance the valuations of the property values to ensure that reducing the secured investment properties’ mortgages doesn’t create too much unsecured debt while simultaneously bringing the amount of secured debt below the limit for secured debt.
Once businesses or even rental properties are included in a Las Vegas bankruptcy, the difficulty of completing it to the debtor’s desires increases significantly. This is why hiring an experienced Las Vegas bankruptcy attorney is so important.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Freedom Law Firm Las Vegas bankruptcy attorney for a free initial consultation by calling 702-903-1354.