A Chapter 13 plan may modify the rights of secured creditors. For example, if the property is worth less than the amount of the secured debt (“upside down” or underwater”), the Chapter 13 debtor may automatically lower the debt to the property’s current fair market value.
In particular, the Chapter 13 debtor is permitted to divide the secured debt into two parts (cram down) – secured and unsecured. The secured part of the debt is represented by the current fair market value of the collateral and must be paid in full through the plan (usually it is done with a balloon payment due in the 24th month of the plan). The debtor may need to sell or refinance the property to make the balloon payment. The unsecured part of the debt is the “upside down” or “underwater” amount, i.e., the difference between the total debt and the value of the collateral, and can be “stripped down”. The stripped down portion of the claim is paid the same percentage as credit cards and other unsecured debts. See Classification of Creditors.
There is one exception. The strip down is not allowed with respect to home mortgages (but see Mortgage Modification in Chapter 13 Bankruptcy), under-secured claims on cars purchased within 910 day (about 2 ½ years) prior to the bankruptcy filing (see also Car Loan Modification in Chapter 13) and to any type of collateral for a debt incurred within one year of bankruptcy filing. The Chapter 13 plan must provide for full payment of these debts, not just the value of the collateral, except that the home mortgage does not need to be paid in full. Payments to the home mortgage may be made over the original loan re-payment schedule so long as any arrearages are made up during the plan.