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Bankruptcy Cram Downs

Both Chapter 11 and Chapter 13 bankruptcy proceedings allow a debtor to “cram down” or “strip off” a secured lien under certain circumstances.

commerce-acts-books-477966-mThe so-called “cram down” statute for Chapter 11 proceedings is contained in 11 U.S.C.  § 1129(b), which allows a bankruptcy court to approve a debtor’s reorganization plan over the objections of a secured creditor so long as the plan is “fair and equitable.” This includes a reorganization plan that modifies the loan terms of a secured loan to convert a portion or the entire loan amount into unsecured debt.

The ‘”cram down” statute for Chapter 13 proceedings is set forth in 11 U.S.C. Section 506(a):

“An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim.”

The effect of the cram down statutes for Chapter 11 and Chapter 13 are essentially the same. Where Chapter 11 and 13 part Chapter company, however, is on the issue of plan longevity. A Chapter 11 debtor may propose a reorganization plan that takes as many years to consummate as he can convince his creditors and the court to accept.

Bankruptcy Code § 1322(d), on the other hand, imposes an absolute time limit on the term of any Chapter 13 plan—five years. This means that while a Chapter 13 debtor may restructure a secured claim using § 1322(b)(2) “the plan may not provide for payment over a period that is longer than 5 years.” Bankruptcy Code § 1322(d)(1). And because § 1325(a)(5)(B)(iii)(I) requires payment in equal monthly amounts, the debtor cannot skirt the five year time limit by proposing a balloon payment at the end of the five year term, absent the acceptance of the plan by the secured creditor under § 1325(a)(5)(A). In re: Fortin, Case Nos. 11-41991-MSH, 11-43774-MSH, Page 9 (Bankr.D.Mass. October 31, 2017), quoting Flynn v. Bankowski (In re Flynn), 402 B.R. 437, 443 (B.A. P. 1st Cir. 2009); Hamilton v. Wells Fargo Bank, N.A. (In re Hamilton), 401 BR 539, 543 (B.A. P. 1st Cir. 2009).

Pursuant to the “cram down” statutes, a claim may be deemed secured only to the extent of the value of the equity of the secured property. In re Mann, 249 B.R. 831, 833 (2000). Further, if the value of property is insufficient to cover the value of a senior secured lien, a Chapter 11 or 13 plan may treat junior mortgages as wholly unsecured and voids or “strips off” that lien, i.e., converts the entire debt into an unsecured claim. Id. At 832.

The distinction between a “cram down” and a “strip off” of a lien is significant in the context of the applicability of the statutes to a lien secured by the debtor’s principal residence.

A “cram down” of a lien secured by the debtor’s principal residence is barred by section 1322(b)(2) in a Chapter 13 proceeding and by 1123(b)(5) in a Chapter 11 proceeding. See Nobleman v. American Sav. Bank, 508 U.S. 324, 332 (1993).

However, there is a split in the bankruptcy and district courts regarding whether or not a lien secured by the debtor’s principal residence may be “stripped off”. Courts in the

First Circuit have held that a secured lien on the debtor’s principal residence for which there is no practical collateral value may be “stripped off” in compliance with the bankruptcy code. See generally In re Mann, 249 B.R. 831 (2000). However there is no clear cut absolute right; and an effort to strip off of a secured lien on a primary residence may prevent plan approval.

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