Orlando real estate investors probably never thought they would be consulting with a bankruptcy attorney to preserve their investments. Who would have thought that chapter 13 of the bankruptcy code would help them hold on to their real estate investments? Orlando real estate investors have been living through the nightmare of watching the loss of value brought on by market forces outside their control. Rampant speculation, bad government policy and massive fraud by Wall street thieves have lead to record deflation in the value of real estate. Who could have imagined ten years ago that a solid investment in owning land would leave owners with mortgage debts that exceeded fair market value of property? Before “short sale” became a household phrase, owning real estate, particularly rental homes, was considered a safe and prudent method of investing money. But now, owners of rental homes in Orlando are drowning in “underwater” properties that are worth less than the mortgages that encumber them. Investors are losing their properties in foreclosure on a unprecedented scale.
However, savvy investors in Orlando with underwater properties are discovering the solution of a chapter 13 bankruptcy. In a chapter 13 bankruptcy, the court will “cram down” the balance of a mortgage on real estate to match the fair market value of the property. The investor will pay a monthly mortgage payment that is based on the “crammed down” balance only, usually on a 30 year amortization schedule. The portion of the mortgage debt that exceeds the fair market value of the investment property is reclassified as unsecured debt. This unsecured balance may be discharged when the investor successfully completes a three to five year bankruptcy plan, depending on the amount of the owner’s income and expenses. At that point, the property is encumbered with a mortgage debt that is based on the fair market value of the property as of the date of the beginning of the plan. Assuming the property value appreciates over the plan period, the owner now owns the property with a smaller mortgage. The investment property now has equity, instead of being “upside down.”
For example, an investment rental home or condominium has a mortgage for $200,000, but is now worth only $100,000. The mortgage debt is “crammed down” to a balance of $100,000.00, and the owner begins making monthly payments based on a 30 year schedule, which would be a principle and interest payment of $536.82. This monthly payment is made for 23 to 59 months in a five year chapter 13 bankruptcy plan. The owner is required to make a final balloon payment to pay off the mortgage debt. The last payment is accomplished by refinancing the property, which should now have equity, making the refinancing an attractive option. The investor now owns the investment property with a new mortgage, preserving ownership and securing the investment with equity.
While the refinancing during bankruptcy may not be a sure bet, a “cram down” in chapter 13 bankruptcy offers owners of investment property the hope of saving their investment, if they have sufficient cash flow to pay a reduced mortgage payment. What this arrangment offers is the opportunity to refinance at a later date when it is hoped that real estate values will be greater than they are today. The lender has no choice – they must accept the reduced monthly payment and “crammed down” mortgage balance if the bankruptcy court accepts the owner’s chapter 13 plan. Who would have thought that the bankruptcy court was the best place for refinancing an investment home?
As a bankruptcy attorney, I find it extremely rewarding helping Orlando owners of investment property save their properties with a plan that creates value over time. Of course a chapter 13 plan may not be for everyone. That’s why I offer a free consultation to anyone who is sincerely interested in exploring solutions that the bankruptcy code offers to individuals and families who are struggling with finances, trying to stay out of foreclosure, and looking for solutions for a better financial future.