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What Are Possible Solutions If The Real Estate Is Under Water?

Robert J. Adams and Associates July 23, 2020

Bankruptcy law allows “cram down” or “bifurcation” of a secured debt. When applicable the debt is divided into a secured debt to be paid in full and the excess to be paid as general unsecured debt.

This Chapter generally does not apply to single family homes or condos occupied by the owner. The Bankruptcy laws have provided special protections to mortgages when lending to homeowners. The law prohibits “cramming down” or “bi-furcating” single family residential property debt when a house or a condo is occupied by the owner. There are 2 exceptions covered later in this Chapter

It is possible to “cram down” or “bifurcate” a mortgage on certain properties, as follows:

  1. Multi-unit apartment building;

  2. Rental units including one family rental home and condo;

  3. 2 or 3 flats where the owner occupies on of the apartments;

  4. Second homes;

  5. Commercial buildings;

  6. Mixed occupancy building such as stores on the first floor and apartments on the 2nd floor;

  7. Single family residences (including condos) where the mortgage liens includes other property. Business loans sometimes extend the lien on the business property to include the owner’s own home;

  8. Single family residential units (including condos) where the last payment on the mortgage notes is less than 5 years away. This usually applies to 2nd mortgages; and

  9. Junior mortgages that are completely “under water” where the market value is less than senior mortgages.

  10. What if a homeowner moves out of their house and rents in out? As it is now no longer the primary residence cramming down the mortgage is possible. We have had clients move out of their house and rent it to tenants and they themselves move into a low rent apartment with the intent of saving the home and eventually moving back.

The terms “cram down” and “bifurcate” essentially mean the same thing. In a Bankruptcy a cram down is where the amount you pay for an asset gets crammed down to what it is worth. You have to pay 100% of the value of the collateral, plus interest. The remainder, however, is repaid at a reduced percentage, usually only about 10%. This can result in thousands of dollars in savings.

If you own a building described above that has a market value less than the mortgage balance you may be able to reduce what you pay to only what the building is worth by filing a Chapter 13 bankruptcy and using a cram down or bifurcation.

What Does This Mean?

Assume you own a 2 flat worth $100,000 but you owe the mortgage company $130,000.

In a Chapter 13 you can repay the mortgage company $100,000 plus interest over a period up to 5 years. (For reference, $100,000 at 5.5% interest over 5 years is $1,910.12 per month.) The remaining $30,000 will be paid a dividend of only about 10% or $3,000 resulting in a savings to you of $27,000.

The Chapter 13 payments would also include trustee’s fees, likely your lawyer’s fees, and any other debts which can also be paid a reduced percentage of what is owed.

The same applies if a Commercial building has a value of $300,000 with a mortgage balance of $400,000.


  1. The Chapter 13 plan must be filed in “good faith” and the real estate must be necessary for an effective reorganization. These requirements could well prevent someone from utilizing the cram down on a second home especially if it a vacation home;

  2. As regards a 2 or 3 flat that the mortgage was obtained it must be clear that at least one unit would be rented or that you are buying a single family home (or condo) as an investment to be rented;

  3. Of course if the mortgage was for the purchase of multi-family apartment building or a commercial building it clearly does not fall within the mortgagee’s protective class;

  4. The application must be accurate. The mortgage company will examine the loan application and documents very closely;

  5. You must obtain a good appraisal with an appraiser who will be willing to testify if necessary. The mortgagee has the right to obtain its own appraisal.

  6. You will be required to pay both the current real estate taxes and hazard insurance yourself.

Other Possibilities

  1. A loan that includes your home and any other asset such as business property or even your car.

  2. A mortgage that includes more than one piece of real estate.

  3. A junior mortgage is totally under water. For example the market value is $100,000 while the 1st mortgage balance is $110,000

  4. If by the terms of the mortgage it must be paid within 5 years, it can be bifurcated-even on a single family home where you live. For example the balance of the junior mortgage is $30,000 while the market value is $100,000 and the mortgage balance of the first mortgage is $90,000-the Chapter 13 plan must pay $10,000 in full and the remaining $20,000 as a general unsecured debt with a small dividend.

If Your Building Is At Risk

Chapter 13 offers many options for dealing with a building and the mortgage on it.

For more information on Real Estate That Is Under Water, a Complimentary consultation is your next best step. Get the information and legal answers you are seeking by calling today.