Copyright (c) 1994 University of Pittsburgh
The Journal of Law and Commerce
NOTES AND COMMENTS: THE DEATH OF MORTGAGE "CRAMDOWN" IN CHAPTER 13: NOBELMAN v. AMERICAN SAVINGS BANK 1
14 J.L. & Com. 141
Elizabeth P. Mullaugh
On June 1, 1993 the Supreme Court issued a short, unanimous opinion barring the bifurcation of undersecured home mortgages in Chapter 13 bankruptcy proceedings, 2 a practice commonly known as mortgage "cramdown." In its simplest form, "cramdown" occurs when the fair market value of a bankrupt debtor's primary residence falls below the amount owed to a financial institution under the mortgage. As part of his or her reorganization plan under Chapter 13 proceedings, the debtor proposes to split the lender's claim under the mortgage into two parts, a secured portion, equal to the fair market value of the property, and an unsecured portion, equal to the amount owed in excess of the value of the property. Generally, the secured portion will be paid off under the plan while the unsecured portion will remain unpaid as unsecured creditors generally receive little or nothing in bankruptcy.
For example, imagine a couple, Fred and Cathy Jones, who borrow $ 100,000 from Metro Mortgage Corporation (MMC) to buy a house. Several years later, after falling behind in their mortgage payments, the Joneses file for personal reorganization bankruptcy. Both MMC and the Joneses agree that the fair market value of the Jones house in 1991 has fallen to $ 45,000. The amount owed on the note, however is about $ 75,000. As part of their reorganization plan, the Joneses propose to bifurcate the bank's claim into two parts, a secured claim for $ 45,000 and an unsecured ...
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