Lenders dread hearing about cramdowns and lienstripping, but since many borrowers have been unable to obtain a loan modification, the next step could be a bankruptcy reorganization to restructure their debt.
During the plan process, the debtor can propose a reduced interest rate and see if the lender will consent. Sometimes, a junior lender may be wholly unsecured and can be “stripped” during this process. Depending on the bankruptcy court’s local procedures, the debtor will either bring an adversary proceeding or file a motion to value the collateral.
Setting the value will determine whether there is equity and whether the lenders are secured.
In the recent case of In re: JOEL RODRIQUEZ LOPEZ, Chapter 13, Debtor. Case No. 10-47520 EDJ. United States Bankruptcy Court, N.D. California. November 24, 2010, the debtor did exactly that. Wells Fargo had a loan secured by debtor’s primary residence in Brentwood, California.
Apparently the property was underwater and Debtor filed the motion to value the collateral in the hopes of limits Wells Fargo’s loan to only how much the property was actually worth, ie, if the property was worth $300k, but the loan was $400k, the Debtor was hoping to cram down the $100k so that $100k of the debt would be unsecured, and thereby paid out differently by the plan, perhaps pennies on the dollar.
Sounds great for the debtor, right? Only one problem–as the court noted “Bankruptcy Code § 506(a)(1) provides that, “[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property…” 11 U.S.C. § 506(a)(1).1 A secured claim is thereby limited to the value of the collateral that secures it. But, § 1322(b)(2) provides that a debtor may not, through the chapter 13 plan, modify the rights of a claim “secured only by a security interest in real property that is the debtor’s principal residence ….” In other words, the first priority lien against the debtor’s residence is exempt from the so-called “cramdown” provision of § 506(a)(1).”
So, nice try, but no cigar in cramming down a 1st position loan. The borrower is stuck. The lender does not have to offer a loan mod, the lender does not have to approve a short sale and the lender does not have to eat a cramdown.