4th Circuit Overrules Own Precedent, Holds Certain Primary Residence Claims Can Be Crammed Down in Chapter 13 Bankruptcies
By Daniel Cohn
The general rule in bankruptcy is that debtors cannot cram down loans secured only by mortgages on their primary residences. But wait, “what’s a cram down?” you ask. For non-bankruptcy folks, a cram down is where a debtor bifurcates a creditor’s claim into a secured claim (in the amount of the value of the property) and an unsecured claim (for the balance of the outstanding debt above the value of the property), paying the secured claim in full and paying the unsecured claim pro rata along with other general unsecured creditors. Take this example: at the time of bankruptcy filing, a lender is owed $150,000, but the property is worth only $100,000. The general rule in bankruptcy is that if the property is the debtor’s primary residence and the lender’s only collateral, the lender has a secured claim of the full $150,000. Otherwise, the debtor could cram the lender down, giving the lender a secured claim of only $100,000 that would be paid in full, and an unsecured claim of $50,000 that would be paid pennies on the dollar. Thus, we can see the obvious benefit to debtors and the obvious detriment to creditors of the powerful cram down option.