Wednesday, April 7, 2010

Cram-Down Confusion

A cram-down is a strategy that is available in a short sale to eliminate the second mortgage from the equation through a Chapter 7 Bankruptcy. Essentially, a Cram-Down permits the debtor to avoid the lien of a wholly undersecured, consensual mortgage lien holder who was probably giving the most resistance to permitting he short sale(holding the whole process up). To illustrate, where a house has a fair market value of $450K and a first mortgage of $450K and a second mortgage of $50K, the second mortgage is wholly undersecured, and the lien can be removed and the debt discharged in bankruptcy. Therefore, the second mortgage has no say if the sale goes through. Sounds great, right? It also works well for mortgage modifications.

Yet, there is confusion if a Cram-Down is available in a Chapter 7 Bankruptcy. Specifically, there are 3 Center Islip Bankruptcy Judges, but only Judge Dorothy T. Eisenberg has permitted the use of a Cram-Down. Further, the other 2 Judges, Judge Robert E. Grossman and Judge Alan S. Trust, both expressly reject the availability of a Cram-Down.

Therefore, until a higher court rules on the issue or the legislature enacts a new bankruptcy law, there is ambiguity if this strategy will work. As of today, a debtor in bankruptcy has a 1/3 chance of this working depending on their luck of being assigned to the right Judge. That's a lot of risk for an expensive legal procedure. It makes it very difficult to advise a Cram-Down as the best strategy. If you desire to try the Cram-Down, I wish you good luck. Lets hope for clarity soon.