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BANKRUPTCY : Reducing Principal Balance, Removing Mortgages and Liens – Bankruptcy Attorney in Los Angeles, Orange County

ANAND LAW PC > NEWS & INSIGHTS > BANKRUPTCY : Reducing Principal Balance, Removing Mortgages and Liens – Bankruptcy Attorney in Los Angeles, Orange County



‘Cramming down’ refers to reducing the amount of the lien to the market value — in other words, if a mortgage balance is greater than the market value of a property, the balance can be reduced down to the market value amount.  Cramming down of liens can be done through Chapter 11 on properties that are not a primary residence.  Liens that may be crammed down include mortgage, HELOC (home equity line of credit), HOA (Homeowners’ Association), and judgment.

In a Chapter 11 bankruptcy, you can also remove fully unsecured liens from your rental properties (i.e. the balance owed on higher-priority liens must fully exceed the market value of the property).  This means that you can fully remove junior mortgages (including seconds, thirds, etc.).  You can also fully remove other junior liens, including Home Owners Association (HOA), tax, and judgment liens.

In a Chapter 13 bankruptcy, you can remove fully unsecured liens from your primary residence.  This includes junior mortgages (including HELOC), HOA, tax, and judgment liens.


Real property valuations are used in Chapter 13 and Chapter 11 bankruptcy proceedings to determine if liens are unsecured, undersecured, or secured, and thus whether or not they can be removed or crammed down.  Valuations are also used to determine if the debtor (the filing party) falls within the debt eligibility limits—if a lien is fully unsecured, it will go toward the unsecured debt limitation, and if it is fully secured or partially secured, it will go toward the secured debt limitation limit.

Property values change constantly, making a critical question, when does the court value the property for the purposes stated above?  Unfortunately, due to a lack of clarity in the bankruptcy code, the time for determining when a property is valued varies by Judge.

For example:

  • In re Abdelgadir, 455 B.R. 896 (9th Cir. BAP 2011). The United States Bankruptcy Appellate Panel of the Ninth Circuit determined that the valuation date for a secured claim was the petition date.
  • In re Crain, 243 B.R. 75 (Bankr. C.D. Cal. 1999).  Judge Vincent P. Zurzolo of the Central District of California stated: “I conclude that the appropriate date of valuation for the Subject Property is the “effective date of the plan” or ten days after entry of the order confirming the plan, provided no timely appeal has been made.”
  • Judge Neil W. Bason of the Central District of California has previously had a “policy of using current value” or in other words of valuing the property as of the current date (the date of the order being requested).

ANAND LAW represents businesses and individuals, in State and Federal Courts (including Bankruptcy Courts) regarding a variety of real estate issues.  The attorneys at our law firm are real estate experts, committed to maintaining a deep knowledge of the law and tenaciously representing our clients.  ANAND LAW proudly serves the cities and areas of Los Angeles, Pasadena, Arcadia, Burbank, La Canada Flintridge, Covina, West Covina, Downey, Santa Monica, Glendale, Eagle Rock, Hollywood, Atwater Village, Echo Park, Glassell Park, Loz Feliz, Silverlake, Highland Park, Boyle Heights, Hancock Park, Cheviot Hills, Koreatown, Miracle Mile, Mid City, Venice, Van Nuys, Encino, Studio City, Sherman Oaks, Panorama City, North Hills, West Hills, Thousand Oaks, Calabasas, Granada Hills, Long Beach, Glendora, Anaheim, Inglewood, Santa Ana, Beverly Hills, Pomona, Marina Del Rey, Playa Del Rey, Mar Vista, Culver City, Cheviot Hills, Holmby Hills, Westchester, El Segundo, Hermosa Beach, Redondo Beach, Manhattan Beach, Huntington Beach, Orange, Irvine, Costa Mesa, Newport Beach, Moorpark, and communities throughout Los Angeles, Orange, Santa Barbara, Riverside, San Bernardino, San Luis Obispo, San Diego and Ventura Counties.

Rule 3007 of the Federal Rules of Bankruptcy Procedure (“FRBP”) requires an objection to be “filed and served at least 30 days before any scheduled hearing on the objection or any deadline for the claimant to request a hearing.” In addition to the FRBP, the Local Rules must also be complied with.  The Local Bankruptcy Rules (LBR) also require 30 days notice.  See LBR 3007-1(b).  Each Judge also has their own so-called “Local Local Rules,” and compliance with these is also required.

An objection may be filed as a Motion or an Adversary Proceeding (“AP”), but compliance with other rules is required, and in certain instances an AP is required.  One such instance is “a proceeding to determine the validity, priority, or extent of a lien or other interest in property” (see FRBP 7001(2)).

In order to be eligible to file for Chapter 13 Bankruptcy, the filing individual(s) must owe less than $1,184,200 in liquidated, noncontingent secured debts, and less than $394,725 in liquidated, noncontingent unsecured debts.  11 U.S.C. §109(e).  The debt limitations are adjusted every 3 years, with the next adjustment set to occur on April 1, 2019.  11 U.S.C. §104(b).

Secured debts include home mortgages, judgment liens, and car loans.  Unsecured debts include credit card bills, medical bills, and personal loans (if a personal loan is secured by property, it will count towards the secured debt limitations).

It is important to keep in mind that a Chapter 13 debtor (the party filing, including a spouse in a joint petition) must meet these debt eligibility limits as of the petition filing date.  If the debts are lowered after the filing date, this will not apply retroactively to make a debtor qualify if they did not qualify at the time of filing.  See, In re Smith, 419 B.R. 826, 829 (Bankr. C.D. Cal. 2009).  See also, Scovis v. Henrichsen, 249 F.3d 975, 981 (9th Cir. 2001) (Eligibility to be a Chapter 13 debtor is determined as of the petition date).

This depends on a variety of factors, including what your score currently is, what chapter you file for, and if you successfully complete your bankruptcy.  While filing for bankruptcy may lower a credit score, it will not necessarily do so. In fact, if you already have a low credit score, filing can actually increase your score, especially after successful completion of a Chapter 13 or Chapter 11 bankruptcy plan in which you pay off some of your debt. Chapter 7 bankruptcy can also, in certain instances, increase a low credit score, after successful discharge.  It is also important to know that you can always re-build your credit after bankruptcy, and ANAND LAW can guide you on how to do so.

In order to understand the unpredictability of how bankruptcy may affect your credit score, it is helpful to understand how credit scores are calculated.


Credit bureaus (also known as “credit reporting agencies”) act an intermediary between consumers, businesses and lenders.  The credit bureaus collect data from various sources, and then use this data to create your credit score.  The bureaus use third-party companies, each who employ their own methodology, to calculate these scores.


There are dozens of credit reporting agencies, but the three national agencies that a majority of lenders and businesses use are Experian, Equifax, and Transunion.  Similarly, there are many credit scoring companies, but the two most common are FICO and VantageScore.  Experian Equifax and Transunion came together to create VantageScore, and all continue to use them to generate credit scores.

The credit scores are based on how the various data collected interacts with each other.  There are approximately 220 million consumers that credit reports have been created for, and approximately 36 billion pieces of credit data utilized in credit reports every year to create the credit scores (source: VantageScore).

The exact methodology used is complicated and uncertain, but factors include: payment history with lenders, banks, and credit card companies; amounts owed; length of delinquencies; length of accounts in good standing; and, types of credit being used.  Scores from each bureau may differ for a variety of reasons, including the timing of the data provided.


Regardless of the credit bureau (e.g., Experian, Equifax, or Transunion), or the scoring agency (e.g., FICO or VantageScore), you can improve your credit score, no matter how bad it is, and no matter the reason for it being low (whether due to bad payment history, repossessions, judgments, liens, foreclosure, or other).  In general, you can improve your credit score by using credit (e.g., through a credit card, line of credit, or loan), and paying bank all use of that credit on time.  The longer you consistently pay on time, and the higher the amount of credit being used, the better your credit score will be.  You can re-establish your credit even after repossessions, judgments, liens, or foreclosure by maintaining a pattern of using credit and repaying the lender timely.  There are lenders willing to extend credit to nearly anyone, regardless of their score, and even lenders that extend credit to individuals in active bankruptcy proceedings.  However, it is important to note that, in general, the lower your credit score, the more it will cost to obtain the credit (i.e., the higher interest rate you will receive)–this makes it even more critical that you pay on time.  The bottom line is that it is not hopeless–with some patience and organization to manage your finances, you can re-establish and build your credit score.

If due to lower income or other unforeseen circumstances that can be documented, the plan can be amended. If the plan is less than 60 months, it can be extended to allow for missed payments to be made up.
The fact that you have filed a bankruptcy will not prevent you from getting credit. While you should expect getting credit to be more difficult and expensive, there are actually many lenders that target people recently discharged from a bankruptcy since they have no other debt, are ready to establish their credit and they can’t file for bankruptcy any time soon.

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