“Cramming Down” on Property Value Depreciation

by Isaac Benmergui, Esq on December 11, 2013

Sometimes the real estate market can be a scary jungle, one requiring the grittiness of your very own Indiana Jones or other adventurer protecting you from serpents, sand traps and other nasties. If you’re well prepared, though, Jones can probably take a seat with his bullwhip and watch you own that jungle all on your own without breaking a sweat. You have to know about some of the advantages you can take with regard to real estate law, and one advantage in particular mortgagemight provide a major advantage in other niches, such as bankruptcy.

I’m talking about what’s called a cram down. Here’s what it is…. Typically, you’ll see what’s called “property value depreciation,” which is nothing more than a house or structure essentially ‘decreasing’ in value over time. It happens. Sometimes, though, what happens is the value of the house decreases faster than the ability to pay a mortgage every year. Typically, it’s called an “upside down” mortgage, where you might have a particular property dropping from, say, $500K to $300K, but you still owe about $350K on the mortgage. Why pay that mortgage when the house isn’t worth that much anymore? That’s the question.

What you do is “cram down” that mortgage to make up for the difference. The remaining $50K actually becomes unsecured debt, a type of debt that can be eligible in a Chapter 13 bankruptcy. Guess what: you’ve apparently saved 50K in your mortgage because of that, all due to depreciation in value. Creditors are forced to lower their amounts of debts, because of just that.

You can only do this, though, for investments and commercial properties. Primary residences? That’s not allowed. Do the research, though, and if you have a second or third mortgage in your name, this might be an option for you. As always, consult with your qualified real estate attorney for more answers.

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