Congress designed Chapter 13 to allow individuals an extended period of time to pay their debts so that they may support themselves and their dependents while repaying their creditors." Chapter 13 bankruptcy is more favorable to debtors than a straight liquidation under Chapter 7 because Chapter 13 debtors may keep all of their assets while Chapter 7 debtors must surrender most of their assets to generate funds with which to pay their creditors. A Chapter 13 debtor also benefits by avoiding the stigma and less favorable credit rating that accompanies a liquidating bankruptcy.s Chapter 13's benefit to creditors is also self- evident: their losses will be significantly less than if their debtors opt for straight bankruptcy.
An emerging trend to interpret the Bankruptcy Code (the "Code") as prohibiting cramdown of residential mortgages threatens Chapter 13's mission.' The term "cramdown" refers generally to any attempt by a debtor to pay a secured creditor less than the full amount of its claim. For example, suppose a debtor previously borrowed $100,000 to purchase a home valued at $150,000. Assume further that the fair market value of that home falls to $60,000 while the amount of the debt remains $100,000. The creditor now lacks security for the full amount of his loan. Cramdown allows the debtor to discharge the debt and retain the collateral by paying only the fair market value of the collateral plus a fraction of the difference between the amount of the debt and the value of the collateral. In our example, the debtor may keep his home, free of any liens or encumbrances, by paying $60,000 plus a fraction, perhaps as little as ten percent, of $40,000. Thus, the debtor might discharge a debt of $100,000, secured by a home that was once worth $150,000, by paying the creditor as little as $64,000.
Cramdown's value to debtors lies in the fact that they do not have to pay their debts in full, but instead may treat the liens on their homes as unsecured claims to the extent that the liens exceed the value of the collateral." Chapter 13 requires debtors to pay unsecured creditors only what they would have received in a Chapter 7 liquidation case.12 This may be nothing at all, and is often as little as five or ten cents on the dollar.'
Whether the Code permits cramdown of residential mortgages under Chapter 13 is an important question. Debtors choose to file under Chapter 13 principally to keep their homes.' If cramdown is found unavailable then debtors may be less likely to choose Chapter 13 rather than Chapter 7 with the ultimate result that Chapter 13's mission is left unaccomplished.
David A. Wisniewski,
Residential Mortgages Under Chapter 13 of the Bankruptcy Code: The Increasing Case Against Cramdown After "Dewsnup v. Timm",
46 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol46/iss4/7