Pre-Bankruptcy Plan To Cram Down Mortgage On Homestead Property : Will It Work?

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.