Chapter 13 Debtor Can Cram Down Investment Mortgage Using Balloon Payoff At Plan's End

Chapter 13 bankruptcy law permits debtors to "cram down" some secured debts. You can cram down secured car loans originated more than 910 days prior to bankruptcy, and you can cram down mortgages on investment real estate. No cram downs allowed for your primary residence. Here’s how it works. Suppose you bought an investment property with cash and a $250,000 mortgage. The property today is worth $100,000. In a Chapter 13 bankruptcy the owner (debtor) can cram down the mortgage to the current property value, $100,000, leaving the debtor with a "bifurcated" debt consisting of $100,000 secured debt and $150,000 unsecured debt owed to the mortgage lender. The unsecured portion of the original mortgage is treated together with the debtor’s credit card debt and other unsecured debts, and any part of the now unsecured $150,000 mortgage loan not paid during the five year bankruptcy plan is discharged at the end of five years (Chapter 13 plans five years max). Here’s the catch. Bankruptcy law requires the Chapter 13 debtor to pay the entire cram-down secured debt ($100,000) during the term of the plan. Paying down the secured part of a relatively small car loan in five years is usually doable, but paying a cram-down mortgage debt, in this example $100,000, in a five year plan can be a big problem for someone whose financial situation has caused them to declare bankruptcy.

One debtor and his attorney came up with a creative cram down plan in a Chapter 13 bankruptcy filed in our Orlando court. The debtor’s plan proposed that during the initial 59 months of his 60 month plan the debtor would make small monthly payments toward a cram-down mortgage secured by the debtor’s investment property. The plan provided for a large balloon payoff of the allowed secured claim at the end of the plan. This plan provided the debtor with affordable plan payments for four years, eleven months during which time he could hopefully qualify to refinance the allowed mortgage balance at the end of the plan.. The mortgage lender objected to this payback arrangement and brought the issue before the bankruptcy court.

The mortgage lender argued that the bankruptcy law requires Chapter 13 debtors to make equal payments toward a cram-down secured debt throughout a five year bankruptcy plan. The debtor responded that the Code requires the cram-down debt be paid during the five year plan without condition- there is no requirement of equal payments and no prohibition of a balloon at the end of the plan. The bankruptcy judge ruled in the debtor’s favor. The judge said that a Chapter 13 plan may provide unequal payments of a cram-down secured debt even if the plan includes a large balloon payment at the end. The judge ruled that the plan must include sufficient interest on the secured debt to make sure that the creditor receives a total amount during the plan, including the balloon, equal in value to what the creditor would have received if the allowed secured debt were paid in full at the beginning of the Chapter 13.

This court’s interpretation provides debtors opportunity to save property in a Chapter 13 where the debtor is eligible to cram down the secured debt. The case is In re Cooper 6:08-11960Download Cooper Order