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Chapter 13 cram downs could come to some primary residences

Many people in Virginia who are unable to repay a large debt burden but want to preserve their mortgages, car loans and similar agreements make use of the provisions of Chapter 13 bankruptcy. Under a Chapter 13 bankruptcy, people have the ability to modify mortgages on investment properties and second homes, as well as car loans and similar secured loans for personal or real property, in a process known as a "cram down."

A Chapter 13 cram down applies when the amount of the loan is greater than the value of the secured property to which the loan applies. In a cram down, the loan is divided into two parts: a secured portion that is equal to the current value of the property and the remainder of the loan, which is grouped with other unsecured debts like credit cards.

A cram down can be used to reduce the interest rate on the unsecured portion, rearrange the payment terms and even reduce the overall obligation. Under current law, primary residences have not been eligible for cram downs or modifications under Chapter 13 bankruptcy. However, some recent cases have hinted at indications where it may be possible to perform a mortgage modification in Chapter 13 bankruptcy for a primary home.

In one Ohio case, a modification was deemed permissible despite restrictions on primary residence cram downs because the mortgage contained a pledge for escrow funds. Several other judges have indicated their willingness to make similar decisions while others have held firmly to refusing modifications on primary residences.

In many of these cases, the mortgage issue has been resolved with a restructuring and settlement rather than a full court order. For people dealing with excessive and unrepayable debt, Chapter 13 bankruptcy may help build a pathway to returning to financial health. A bankruptcy lawyer may be able to help people struggling with bills and debt to reorganize that debt into an affordable payment plan.

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