The Benefit of Filing Chapter 13 Bankruptcy on Investment Property

If you're caught with investments whose value has declined--while your payments (mortgages or other loans) on them have not, file Chapter 13 on your investment property.

What Is Chapter 13

Chapter 13 is a type of bankruptcy called "Individual Debt Adjustment." In it, a debtor's assets are not touched--unlike in Chapter 7, his or her property and belongings are not liquidated for creditors. Instead, a repayment plan will be developed for the debtor. This is a court-ordered budget which the debtor will have to live by for the next three to five years. Under it, he or she will pay all his or her "disposable income"--which is all income less court-approved (and fairly basic) living expenses and amounts owned for taxes and certain other protected obligations, such as child support--to creditors. At the end of the plan period, any remaining debts are discharged, or wiped out.

What Happens to Secured Debts in Chapter 13

Bankruptcy does not eliminate any security interest in property. That is, if property is serving as collateral for a loan, if the loan is not paid, the lender can still foreclose. Chapter 13 will give the debtor some time to catch up on back or past-due payments, but it does not affect the basic obligations under the loan--except as defined below.

The Chapter 13 Cram Down

The purpose of collateral is to protect the lender in case of default; the lender may not be paid the way they wanted to be, under the loan, but at least they can get the property. Of course, it only protects the lender up to the value of the property. Recognizing that limitation on the protection afforded by secured debts, the law allows the value of property securing a loan to be "crammed down" to the then-current market value. That is, while the debtor still has to pay, the amount he or she pays will be based on the value of the property when bankruptcy was filed, not based on the outstanding loan balance.

The cram down is available for any property other than the debtor's residence (e.g. their home). In particular, it is available for investment property whose value has declined so that it is "underwater" on its loan.

How an Attorney Can Help

Bankruptcy can be very technical and complicated. An attorney can help make sure you choose the right option for your situation, and handle all filing and notice requirements properly and in a timely manner. In particular, a lawyer can help you understand if the Chapter 13 cram down will work for you, and then make the case to the court for the cram down.

Think Bankruptcy Might Be for You?