Debt is never easy to deal with, and bankruptcy is designed to make excessive debt possible to recover from. The two main types of personal bankruptcy, Chapter 7 and Chapter 13, allow for people to maintain some assets during the recovery process or allow a trustee to sell assets off and settle debts.
Chapter 13 bankruptcy allows a person to keep many assets, including a second home or investment property. It is often necessary to modify a mortgage and split it into a secure piece equal to the market value of the property and the unsecured debt. This process is often called a "cram down."
A section of Ohio bankruptcy cases in recent months, however, applies these modifications to primary homes as well. A bankruptcy judge in Youngstown found that a mortgage equated to more than a simple interest in the property and this modification could be applied to a primary residence.
Lawyers in Ohio are now eyeing this ruling as an indication that the "cram down" provision in some Chapter 13 bankruptcies may now apply to primary residences, even though the case in question was settled rather than decided in court. A judge later denied a motion to dismiss a bankruptcy proceeding based on the ruling as well.
There has already been disagreement among jurists in the Buckeye State about this possibility. Until that is resolved, debtors filing for Chapter 13 bankruptcy may use this ruling as a bargaining point to get a "cram down" during the proceedings.
Bankruptcy is a complicated legal process and debtors must take care that they are able to retain as much value as possible. An attorney can help clarify how these arrangements work and protect debtors' interests in court.
Source: DS News, "Ohio Courts Could Change Course for Chapter 13 Bankruptcy," LeAnn Covey, accessed Feb. 22, 2018