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Cram down question raised by Ohio court decision

If a debtor in Minnesota files for Chapter 13 bankruptcy, it may allow for a cram down of a vacation or investment property. What this means is that the market value of the home becomes a secured debt. The difference between the market value and what is left on a mortgage becomes an unsecured debt. In most cases, this is not true for the first lien on a primary residence.

The first lien is generally secured in full assuming the debtor still lived there when filing for bankruptcy. However, an Ohio court ruling may have changed the way that this is enforced. In a case involving SunTrust, the judge ruled that the lender had an interest in more than just the property. This is because there was also a pledge for escrow funds. The ruling was a cause for worry among attorneys representing creditors because escrow provisions are common in Ohio mortgages.

Some attorneys who represent debtors believe that the ruling could be the basis for asking for a primary residence cram down in other cases. However, it is possible that the issue will be brought before the 6th Circuit at some point. Doing so may provide a final answer on whether or not cram downs on primary residences are proper per the bankruptcy code.

Filing for bankruptcy relief may be an ideal way for debtors to get out from overwhelming debt. In a Chapter 13 filing, debts are addressed in a payment plan that lasts three or five years using regular income earned by a debtor. In the meantime, creditors are generally unable to foreclose on a home or repossess other secured assets. This may provide time for debtors to negotiate new loan terms with their creditors.

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