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Court decisions could signal change in mortgage modifications

In Chapter 13 bankruptcy cases, debtors have the ability to modify their mortgages in certain situations. A string of recent decisions may signal a trend that could affect the way bankruptcy courts in Michigan address these modifications. In these cases, a number of Ohio judges have issued rulings that greatly expand a debtor’s access to so-called “cram down” modifications to a residential mortgage. This is a major change from the status quo.

Under bankruptcy law, a cram down is the modification of an underwater mortgage. When the amount of the loan is more than the value of the property, a cram down may be used to bifurcate the mortgage claim. This bifurcation would reclassify the amount of debt owed on the mortgage above the value of the property as unsecured debt. The end result after the bankruptcy discharges the unsecured portion of the debt is a mortgage that is no longer underwater. It has long been the rule that cram downs were not available on the primary residence of a debtor.

Recently, a bankruptcy judge for the Northern District of Ohio ruled that certain mortgages on a debtor’s primary residence could be crammed down. The judge reasoned that because the mortgage provided not just for the mortgage payment but also included a pledge for escrow funds, the rule barring a cram-down modification did not apply. Other districts in Ohio issued similar rulings shortly afterward. This series of decisions has creditor attorneys on edge given that nearly all residential mortgages include a pledge for escrow funds.

This is only one example of how bankruptcy law can evolve over time. If this particular trend spreads to other states, then bankruptcy courts across the country will likely see a flurry of activity as debtors amend their plans to take advantage of lower monthly payments. Lawyers with experience in bankruptcy law work to keep up with the shifting landscape of bankruptcy law and may be able to help a person seeking a fresh financial start through bankruptcy. A lawyer may advise individuals on the appropriate type of bankruptcy to file and whether or not a mortgage cram down is a possibility.