Orlando bankruptcy attorneys have been helping owners of investment real estate to “cram down” mortgage balances in a chapter 13 bankruptcy. However, a recent decision in a chapter 13 bankruptcy case shows that there are limits to when a cram down on investment real estate will be granted. Orlando bankruptcy attorneys have taken notice that chapter 13 bankruptcy requirements must still be met before a cram down is granted.
In the case of In re Cooper (6:08-BK-11960-ABB), orlando bankruptcy judge Arthur Briskman first permitted a real estate investor to cram-down, or lower, the balance of mortgage debt to match the fair market value of the investment property. Since that decision, Orlando bankruptcy attorneys have using the cram down procedure to help their clients lower the balances of mortgage debts. (I have written in past blog posts how this procedure works.) However, in a recent case, the debtors appeared to have pushed too far in trying to benefit from the cram down procedure, while disregarding the basic requirements of a chapter 13 bankruptcy.
Chapter 13 bankruptcy relief is rooted in an essential agreement between the debtor and the court: the bankruptcy court grants a discharge of all debts, in exchange for an agreement by the debtor to dedicate excess disposable income to unsecured creditors over a period of 3 – 5 years, and to make arrangements for paying the secured creditors for any property that the debtor wishes to keep.
In a recent chapter 13 bankruptcy case, the debtors ran afoul of this basic agreement. Judge Briskman, who wrote this recent opinion, also felt that the plan had not been proposed in “good faith,” another essential requirement for obtaining a discharge in chapter 13 bankruptcy.
In this case, the debtors moved out of their home just three days before filing chapter 13 bankruptcy. They did so to try to take advantage of the cram down procedure, which is only available for investment property, not residential homes. In their chapter 13 bankruptcy plan, the debtors did not agree to pay all of their disposable income. However, perhaps the most significant deficiency in their proposed chapter 13 bankruptcy plan: the debtors failed to show that they had leased the property, and that the rents on the property would cover the cost of keeping the property, including the monthly mortgage payments on the crammed down loan balance. This fact was seemed to be of particular importance to Judge Briskman:
“They filed this case with the intent to retain two investment properties that have no equity, created a net operating loss each month, and are not necessary to an effective reorganization. They intend to retain and fund those properties at the expense of and detriment to their unsecured creditors, with the hope they will benefit later from increased real estate values. They are speculating with their creditors’ funds. ”
Based on this, and other technical deficiencies in their chapter 13 plan, the debtors were denied relief.
The take home message from this case is clear: if a debtor intends to keep investment property with a cram down of the mortgage balance, the property must generate net income, or at least break even on the expense of maintaining the mortgage debt and other expense of maintaining the property. The debtor’s disposable income, which must be pledged to unsecured creditors, can not be used to fund the operating losses on investment property. Also, a plan to cram down the mortgage debt for investment property must be proposed in good faith. It cannot be a ruse for trying to keep the family home.