A growing trend in Chapter 13 bankruptcy cases has affected the way residential mortgages are treated in bankruptcy court. A series of decisions from bankruptcy courts has expanded the application of so-called “cram down” mortgage modifications. Should this trend spread to Kentucky bankruptcy courts, it may have a major effect on debtors who own property.
In Chapter 13 bankruptcies, current law allows the modification of mortgage agreements in some circumstances. A cram down modification is a tool used by some debtors with underwater mortgages. The modification bifurcates the mortgage claim and reclassifies any mortgage debt above the value of the property as unsecured debt. This is important because any unsecured amounts will be discharged once the bankruptcy is completed. The net result of a cram down modification is that the mortgage is no longer underwater. However, current bankruptcy rules do not allow cram down modifications for a debtor’s primary residence if the debtor was living in the residence at the time the bankruptcy was filed
A string of cases from Ohio could be signaling a change to that rule. A judge in the Northern District of Ohio ruled that the ban on using a cram down modification on a debtor’s residential mortgage did not apply because the lender had more interest in the case than just receiving mortgage payments. According to the decision, the inclusion of a pledge for escrow funds was grounds for not applying the rule that bars cram down modifications on a residence. Shortly thereafter, a number of other bankruptcy judges in Ohio issued similar decisions.
The way bankruptcy law is interpreted is frequently changing. An attorney with experience in bankruptcy law may be able to help a person seeking a fresh financial start navigate the process and stay abreast of recent changes in the law. An attorney might also assist debtors who are already in bankruptcy on any changes in the law that might help lower their payments each month.