Chapter 13 can change interest rate and reduce debt on home to value of home when final payment on mortgage is due before final payment under plan

Chapter 13 can change interest rate and reduce debt on home to value of home when final payment on mortgage is due before final payment under plan:

While the general rule in chapter 13 is that the debtor cannot modify the mortgage on a debt secured by the debtor’s principal residence (the debtor can cure and reinstate, but not change the terms of the mortgage); an exception to this rule comes into play when the final payment due on such mortgage comes due prior to the final payment due on the chapter 13 plan. This was the ruling in a recent California bankruptcy case: In re Collier-Abbott, 2020 Bankr. LEXIS 1402, Case No. 19-21310-E 13 (Bankr. E.D. Cal., 27 May 2020).

The chapter 13 bankruptcy was filed on 1 March 2019, with a five year repayment plan. The final payment, which was a balloon payment, on the mortgage was due on 1 April 2020. Here the debtor filed a motion to have the court rule what the value of the home was, supported by a broker’s price opinion, and asserted that the exception contained in section 1322(c)(2) of the bankruptcy code allowed a bifurcation of the mortgage holder’s claim into secured and unsecured portions. The creditor asserted that §1322(c)(2) only applied to short term mortgages, and thus was inapplicable to the case.

The court examined the debtor’s broker’s price opinion and the creditor’s appraisal. Noting that while both refer to substantial damage to the property, only the broker’s price opinion took into account the damage to the property, and accepted the valuation in the broker’s price opinion.

Note that while this does show a use for valuation of homestead properties, the debtor is still faced with effecting a feasible plan to pay the rather high value over the short 5 year maximum time period for chapter 13 plans.

Michael Barnett, Esq.
Michael Barnett, PA
506 N Armenia Ave.
Tampa, FL 33609-1703
813-879-3100