Most people who seek bankruptcy protection are looking for help to avoid foreclosure of their primary residence. However, there are cases in which an investment property owner ends up in financial trouble and needs help protecting their other properties. A traditional bankruptcy can help alleviate mortgage debts with a primary residence, as well as investment properties. However, the method by which the bankruptcy process helps protect an investment property is quite different.
Chapter 13 Negotiations
When looking for help with mortgage debts on any property it is important to note that you will be required to repay the debts on the mortgage if you want to keep the house. This is done by filing for Chapter 13 bankruptcy, in which you will negotiate a repayment plan to satisfy your mortgage debts. In most cases, a mortgage for a primary residence is eligible to receive an extended time period to repay your debts, a waiver of delinquency fees or an elimination of a second mortgage on the property. You cannot obtain a reduction in the principal mortgage loan amount on a primary residence.
Entering Chapter 13 for a mortgage on an investment property usually allows for more concessions than a mortgage on a primary residence. Investment properties may be eligible for a “mortgage cramdown”, which grants a reduction of the principal balance of the mortgage to the actual value of the property. Properties that have a higher mortgage loan debt than property value may be eligible for this principal loan reduction. The cramdown allows for the difference between the amount owed and the actual value to be turned into an unsecured debt and eliminated, while the amount equaling the home’s value is repaid over time. A mortgage cramdown may also lower the interest rate on the loan and eliminates the deficiency balance liability on the loan.