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Exceptions Cloud 'Cram Down' Rules

Attorneys Marc Ben-Ezra and Asher Perlin say that while home mortgage lenders benefit from favorable treatment under the bankruptcy code, they must watch out for exceptions that might allow bankrupt debtors to reduce the size of their mortgage obligation.

Recently, the two attorneys outlined the ramifications from a "recent flurry of cases in Federal Courts of Appeals" that have limited this protection for both undersecured and wholly-secured mortgage loans.

For instance, the courts seem to have made an exception for "balloon mortgages," treating them as short-term mortgages and allowing the debtor to seek a modification of the debt amount, the attorneys said in a recent article. Short term mortgages are largely considered exempt from the anti-cram down provisions.

While no binding court decision on the balloon mortgage question has been issued, they say that recent decisions are "a clear signal as to how the majority of courts will likely treat partially secured balloon mortgages."

Courts consider a home loan partially secured if the amount of mortgage debt exceeds the current market value of the home.

In addition, "unsecured" home loans also may be found exempt from the prohibition on "cram downs" or "strip downs" in Bankruptcy Courts, they warn. Recent court cases have sided with this viewpoint.

Those "unsecured" claims may include home improvement, home equity and high loan-to-value ratio loans where the first mortgage amount exceeds the value of the property at the time of bankruptcy.

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