A series of bankruptcy court decisions could signal an impending shift in the way Tennessee courts treat residential mortgages. In a number of cases, Ohio bankruptcy judges greatly expanded a debtor’s ability to “cram down” a mortgage on their primary residence. This marks a stark change from how most courts treat these mortgages.
In bankruptcy terminology, a cram down is a process in which a debtor can modify a mortgage on real property whose current market value is less than the amount owed. A cram down bifurcates the mortgage claim, which leaves the amount of debt equal to the value of the home as secured debt but reclassifies the remaining debt as unsecured. This gives a debtor the opportunity to leave the bankruptcy proceeding with a mortgage that is no longer underwater once the unsecured portion of the mortgage is discharged. Bankruptcy courts have long held that cram down modifications are not available on a debtor’s primary residence if debtors lived in the residence at the time of filing.
The new series of decisions in Ohio may portend a shift towards allowing cram down modifications on primary residences, however. A bankruptcy judge in the Northern District of Ohio recently ruled that because language in the mortgage included a pledge for escrow funds on top of the mortgage payment, the federal statute barring a cram down of a residential mortgage did not apply. Other bankruptcy courts in Ohio have recently issued similar rulings. These decisions are concerning to creditors given that escrow language is common in nearly every mortgage.
Bankruptcy law is always evolving. If the law allows cram down modifications to residential mortgages, a debtor may be able to modify their mortgage and obtain significantly more manageable payments. Lawyers with experience in bankruptcy law stay abreast of changes in the legal landscape and may be able to help a person receive a fresh financial start by filing a Chapter 13 bankruptcy and taking advantage of new ways to reduce their debt.