NJ Court Cans Condo Cramdown

The United States District Court for the District Court for the District of New Jersey recently dealt some bad news for New Jersey condominium owners attempting to restructure their debt in bankruptcy. In Whispering Woods Condominium Association v. Rones, the Court reversed an earlier Bankruptcy Court ruling, holding that a condominium association’s lien for assessments (condo fees) could not be crammed down in bankruptcy.

What is a cramdown?

If you are not familiar with bankruptcy lingo, a “cramdown” is a proceeding in a bankruptcy case that asks the Court to reduce the balance of a lien on real or personal property because the amount of the lien exceeds the value of the property. This is sometimes also referred to as “stripping” or “bifurcating” the lien. This is a helpful tool for people that are underwater in certain qualifying liens. For example, let’s say that your car is only worth $10,000.00, but you still owe the bank $15,000.00. You could cramdown the loan to the value of the car ($10,000.00) and the remaining $5,000.00 would be treated as an unsecured debt. In many Chapter 13 bankruptcy cases unsecured creditors do not receive the full amount of their claim, so if you were successful in cramming down your loan, you may end up paying the loan off for substantially less money.

There are certain debts that cannot be crammed down.

There are certain debts in the bankruptcy code that cannot be crammed down. Notably, a lien that is secured by an interest in real estate that is your primary residence (such as a first mortgage on your home) cannot be crammed down thanks to the “anti-modification clause” found in Section 1322(b) of the Bankruptcy Code. Second mortgages or other liens on your primary residence can only be crammed down if they are “wholly unsecured”, meaning that your home’s value is less than the prior mortgages.

Turning back to condo fees.

If you own a condo, I’m sure you’re aware that you have to pay your condo assessments. If you don’t, most state’s laws provide for a lien on your home until they get paid. Typically, to protect first mortgage holders, this lien is subordinate, at least in part, to a first mortgage. Turing back to the Whispering Woods case, the homeowners attempted to cramdown the entire condominium lien by arguing that that their home was worth less than the balance due on their first mortgage. They they convinced the Bankruptcy Court that the condominium lien was “wholly unsecured” because the first mortgage balance exceed the value of their home.

This District Court disagreed, relying on New Jersey’s “super-lien” provision to reverse the Bankruptcy Court’s ruling. New Jersey, like most other states, provides that a limited portion of a condominium lien retains priority over other liens, including first mortgages. In New Jersey and Pennsylvania, a condominium retains a six month lien for assessments over the first mortgage. This is commonly referred to as a “super-lien”. Because of this “super-lien”, the District Court found that the condominium’s lien was at least partially secured, and rejected the homeowners attempt to cramdown the lien.

What does this mean for condo owners in bankruptcy?

While you cannot cramdown a condominium lien, you still might have other options to deal with substantial, past-due condo fees in bankruptcy. An experienced attorney can help you evaluate your financial situation and find solutions to your debt problems. The Mays Law Firm PC offers a free, no-obligation consultation. Call (215) 792-4321 now to schedule a consultation.