By Mike Appleton, Guest Blogger

In 1984 Leonard and Harriet Nobelman purchased a condominium with the assistance of an adjustable rate mortgage loan from American Savings Bank.  Six years later, the Nobelmans encountered financial difficulties and filed Chapter 13 proceedings in bankruptcy court.  At the time of their filing, their mortgage balance, including accrued interest and late fees, was $71,335.00 and the fair market value of their home was only $23,500.00.  Accordingly, the Nobelmans proposed a reorganization plan which treated the difference between the mortgage balance and the fair market value, a total of $47,835.00, as unsecured debt.

Under bankruptcy law, the reclassification of indebtedness exceeding the value of the collateral from secured to unsecured status is known as a “cramdown.”  This is a commonly used device that effectively “strips” the lien of a security interest down to the collateral’s value.  It enables a debtor to retain property while insuring that the secured creditor will recover at least…

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