Cram Down

• 1). File for Chapter 13 bankruptcy protection. Usually, once you are under bankruptcy protection, the principal of any property that is worth less than you owe can be reduced or "crammed down" to the current fair market value (FMV).
  
  
• 2). Consult with a bankruptcy attorney. Typically, a cram down cannot be done on a primary residence, but it may apply to an investment property. For example, if you have a rental property for which you owe $180,000, and the property's FMV has dipped to $125,000, the cram down rule can be used to reduce your principal to $125,000, effectively eliminating $55,000 of debt.
  
  
• 3). Hire a professional property appraiser to obtain an accurate, current FMV. To reduce principal in Chapter 13 bankruptcy, you must be able to establish that the investment property is worth less than you owe.
  
  
• 4). Ask your lawyer to check whether you meet the conditions that would allow you to cram down the mortgage principal on your primary residence. If the mortgage on your home is secured by any other real or personal property, other than the residence itself, you may qualify. For example, if your primary residence was purchased with a cash-out refinance using the equity in a rental property you own, you may be able to reduce the principal on your home, with the remaining balance treated as unsecured debt.
  
  
• 5). File your repayment plan with the court and stick to the plan. If you fail to make any payments required by your plan, it may be dismissed with the original mortgage principal remaining to be paid.
  
  

Lien Stripping

• 1). Consult with your bankruptcy attorney. Lien stripping may be a viable way to reduce principal in Chapter 13 bankruptcy if you owe more than your home is worth.
  
  
• 2). Hire a professional appraiser to evaluate your property. If the current fair market value falls below what you owe on your mortgage, then any second or third mortgages on the property become unsecured debt. The property's value is insufficient to secure any additional liens beyond the first mortgage, and, generally, the secondary liens would be discharged as part of your Chapter 13 plan.
  
  
• 3). Incorporate into your plan the specifics about the FMV of your home, total amounts owed on the first mortgage and any secondary liens, lender information and a request to "strip" the additional liens from your debts. Include a statement that the specified values in the plan should be binding to all creditors.