Chapter 13 bankruptcy can strip a second mortgage on your primary residence, and Chapter 13 can cram down to market value mortgages on investment property. Properties rented for income are investment assets subject to cram down. The debtor cannot cram down or in any other way alter the terms of a first mortgage on his primary residence. Another Orlando bankruptcy attorney suggested the following pre-bankruptcy planning for people intent on keeping their “upside down” primary residence.
Here’s the plan. The future bankruptcy debtor moves out of his homestead and lists it for rent. The debtor rents his former home on a short term lease. Meanwhile, the same debtor moves into a rental apartment or rental home. Then, the debtor files Chapter 13 bankruptcy and lists his former residence, now a rental property, as an investment property. He files a motion to cram down the first mortgage on the former homestead to current value and strip the second mortgage. Assume the court grants the motion to cram down the mortgage. A reasonable time thereafter, and as the Chapter 13 plan progresses, the debtor does not renew his tenant’s lease and moves back in to his former home, now with a crammed down mortgage. The debtor figures that as long as he his current on his Chapter 13 payments no one is going to inquire where he resides.
None of my clients have tried this so I have no experience whether the plan works. The plan is clever, but in my opinion, and I may be wrong, it’s a fraudulent plan because the debtor in this hypothetical does not intend his former residence to be an investment property. Nevertheless, this planning could work, and maybe people are utilizing this type of Chapter 13 plan. Any bankruptcy plan can work if the critical people don’t know about it; but, in the long run, secrecy is not something to rely upon.
I think it’s ingenious. Up where I practice (in Pittsburgh), I don’t encounter a lot of folks whose first mortgages put their homes underwater. Second mortgages are a different matter. . . .
In your scenario, you are right though that this scheme could fall flat if the Debtor moves back into his original residence after the cramdown. It’s definitely food for thought though.
Wouldn’t you have to then pay the full crammed down valu of the house during the plan?
Hypatheticaly if the 1st Mortgage is 215K and the 2nd home equity line is 185K. If filing Chapter 13 how is the home determined to be valued? If it is valued at 250K do they deduct the amount of the first leaving 35K over the amount owed. Then would they deduct the 35K from the 2nd and forgive the 150K balance from the 2nd?
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Under the above scenario, it would seem the debtor would be taking a chance that the court later would find that the claim for cramdown was fraudulent because the residence was never really intended as an investment property. The conversion was done only to circumvent the Bk laws, and this argument is strengthened by the fact that after the cramdown order the debtor moves back into the home! If anything, I would have my client keep the residence as a rental property until the Ch. 13 plan is terminated. What’s to keep the lender from periodically checking up on the debtor’s place of abode? (Note: I am a Bk lawyer in CA)
Wow this is really creative. I would like to know if this has worked for anyone. I am certainly giving this some idea.
I am a bankruptcy attorney in S. Florida and am giving this a shot. Will let you know how it goes.
Where can I find a copy of a motion to cram down a mortgage in florida?