During the housing boom, many investment properties were purchased to increase income and build portfolios. Now, many of these properties are underwater and no longer producing income as tenants struggle to pay rents. If you’re an individual investor in a similar situation and you’re wondering what to do with your investment property portfolio, consider the benefit of what is called a “cramdown” of those mortgages under Chapter 11 of the Bankruptcy Code.

A cramdown of the mortgage pursuant to 11 U.S.C. §1322(b)(2)  provides that a debtor may not modify the secured lender’s rights if the lender’s claim is “secured only by a security interest in real property that is the debtor’s principal residence.”  Where a creditor takes an interest in real property that is not the debtor’s principal residence, such as property that will be used as income generating rental property, the anti-modification provision does not apply.

What this means is that you can “cramdown” the amount you owe on these investment property mortgages to the current market value. This will restructure the debt to an affordable level and allow the potential rental income to support this lower payment.

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