Mortgage Meltdown: Foreclosure Offense and Defense: Cram Down and Adversary Proceedings in Bankruptcy Court

Here is an email I sent to a victim of the mortgage crisis:

So you are in Chapter 13. Do you have a lawyer?

There are some options in bankruptcy court that might be available under current law. The two that I have in mind for you, without any details, are the availability of “cram down” and the use of an adversary proceeding. “Cram down” refers to a process wherein a creditor has terms crammed down his throat that he otherwise wouldn’t accept. There are many theories and bases for cram down but I can tell you it is used consistently in bankruptcy. 

Cram down is always an option in Chapter 11 so you might have to convert from Chapter 13. I am not an expert on BKR law anymore so I would go to your lawyer or www.bankruptcylawnetwork.com as a starting point. It involves equitable and legal factors and if the right case is made, the Court will order it.

Second is an adversary proceeding in which you sue the lender and include everyone in the pipeline who got you into this mortgage and note and the terms that were presented to you as “good terms.” The counter-argument that you signed the documents, that there was adequate disclosure in the documents etc., will fall flat in the context of the vast mortgage meltdown which the bankruptcy judges, trustees, and trustee’s counsel are now very familiar with. Everyone wants to help you. But YOU have to give them a legal reason to hang their hat on. 

The combination of the adversary proceeding, the conversion to a proceeding that allows cram down and the well written brief to cram down the new terms against the lender, will certainly slow things down if there isn’t already a timeline that can’t be moved. Remember that the proceedings, while designed to protect the debtor are also there for the protection of the creditors. And you must take steps to present your cram down proposal to the creditor(s) for their vote. In most cases their rejection will not be presumed — it must be shown on record. 

So when you submit your proposal, you want to submit something that shows that it is in the best interest of EVERYONE to have it done even if they don’t agree. This can only be done by demonstrating that your proposal is the best one you can come up with given your particular circumstances, that you have rights against the creditor(s), that the creditor(s) might not have legal standing to make a claim (because of the sale using documents that did not perfect the sale), and that the creditor is not being cut out of the process and losing everything (even though under TILA and RICO and other laws he might be at risk for exactly that).

But rather, that you have a plan to reduce the principal amount of the mortgage for purposes of amortization, that the lender has contingent equity rights when the property is refinanced at a higher amount than the cram down amount, and that the creditor and other parties have a right to show the mortgage as reinstated and therefore no requirement of a write-down in value is required on their balance sheet. This will preserve not only the due process and property rights of the lender but might actually go to assisting the lender in staying afloat. 

It is even possible that the lender and the holders of CDOs (CMOs) might see the logic of this which requires no expenditure of new money and gets the conflict off the table. 

Tags: bankruptcy, Chapter 11, Chapter 13, cram down
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