[Bankr-L] Lump sum payment to secured creditor in Chapter 13
Posted: Tue Jun 01, 2010 10:11 am
1325(a)(1)(B)(iii) isclear, "If property to be distributed pursuant to this subsection is in the form of periodic payments, suchpayments shall be in equal monthly amounts"(emphasis added).
Attempting to read in the possibility of a final payment that is somehow not aperiodic payment, seems tome to be too big of astretch.Casescited in the footnote regarding possible balloon payments appear to beexclusively pre-BAPCAP, before BAPCPA added(B)(iii) arguably closing the door on the possibility of a ballon payment no matter what the source and reagardless of the adequate protection provided tothe lenderin the value of the collateral or the amount of the periodic payments.
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To: cdcbaa@yahoogroups.com
Sent: Tue, June 1, 2010 8:15:32 AM
Subject: [cdcbaa] FW: Lump sum payment to secured creditor in Chapter 13
Response to an earlier interesting post about balloon payments in C13 plans.
Mark Scarberry is the bankruptcy professor at Pepperdine and a frequent contributor of scholarly articles
Peter Lively has already commented on this - others may want to join in.
David A. Tilem
Certified Bankruptcy Specialist*
Law Offices of David A. Tilem (a debt relief agency)
206 N. Jackson Street, #201, Glendale , CA 91206
Tel: 818-507-6000 Fax: 818-507-6800
* Bankruptcy specialist cert. by State Bar of CA Bd of Legal Specialization.
ication
Sent: Saturday, May 29, 2010 10:53 PM
Subject: Re: Lump sum payment to secured creditor in Chapter 13
Dennis Wheeler asks a very good question. Textually perhaps the best argument is the "periodic payments" are in equal amounts, and that the lump sum or balloon payment at the end is not a periodic but rather a final payment. That would seem, however, to leave a hole in the provision large enough to drive a truck through.
In preparing an article for the Pepperdine Law Review's symposium on the mortgage crisis, I did not find any case authority on this question of whetherBAPCPA's requirement of equal payments precludes such lump sum or balloon payments plans. What I could find on such plans is described in a long footnote that is copied at the end of this message.
Given the small amount of amortization that would occur over 5 years on a 30 year amortization schedule, and given the current very unstable market for residential real property, I'd have to disagree that the lender in this case is adequately protected. It also seems to me that in such a case the court should not find that the final payment is sufficiently likely to be made that the plan should be confirmable.
If values continue to drop, the debtors will not be able to refinance or sell for a sufficient amount to make the lump sum (balloon) payment (unless the court has undervalued the property). The debtors then could dismiss their case or convert to chapter 7, leaving the lender to foreclose on a property that is worth less than it was worth when the chapter 13 was filed.I realize that courts (at least prior to BAPCPA) usually took the position that the making of regular payments on a secured debt would provide whatever adequate protection might be needed during the plan period. That does not strike me as a serious provision of adequate protection, especially in a declining market.
I would be interested to hear from other list members how often they are managing to confirm such plans with lump sum (balloon) payoffs on undersecured mortgages secured by real property other than the debtor's principal residence.
Mark Scarberry
Pepperdine
P.S. Here is the footnote:
Mark S. Scarberry, A Critique of Congressional Proposals to Permit Modification of Home Mortgages in Chapter 13 Bankruptcy, 37 Pepp. L. Rev. 635, 666-67 n. 131 (2010) (available at http://ssrn. com/author 48574):
131.A plan that called for a large balloon payment, based on a contemplated sale or refinancing
of the home during the Chapter 13 plan, could possibly satisfy the requirement of 1325(a)(5)(B)
that the amount of the allowed secured claim be paid off with interest during the Chapter 13 plan
without providing such a head start.INST. J. 1 (1997). But Chapter 13
plans calling for large balloon payments to be made near their end by way of refinancing or sale of
the home will seldom be confirmable in(Bankr. E.D.N.Y. 1992) (noting that it was most dubious whether a plan calling for a balloon
payment could meet the feasibility requirement of 1325(a)(6)). To confirm a plan, the court must
find that the debtor will be able to make all payments under the plan and to comply with the plan.
hapter 13 feasibility
requirement applies to balloon payments. Some ask whether there is that [the debtor] actually could make the balloon payment. In re(Bankr. M.D. Fla. 2000) (following In re Crotty, 11 B.R. 507, 511 (Bankr. N.D. Tex. 1981)); accord
In re Tornheim, 239 B.R. 677, 683 n.5 (Bankr. E.D.N.Y. 1999). Other courts require that the debtor
nder the proposed plan. In re
Harrison, 203 B.R. 253 (Bankr. E.D. Va.Mont. 1986). The First Circuit Bankruptcy Appellate Panel seemingly endorsed both of those
approaches. See First Natl Bank of Boston v. Fantasia (In re Fantasia), 211 B.R. 420, 42324
(B.A.P. 1st Cir. 1997) (listing factors courts have considered and citing approvingly both Crotty and
Schenk). Another approach is to say that certainty is not required, butreasonable likelihood of success. See, e.g., In re Gillis, 333 B.R. 1 (Bankr. D. Mass. 2005).
seems to be whether the debtor hasill have
sufficient equity in the home due to principal amortization under the plan, to make it likely that the
debtor can refinance. Without question, plans may contain balloon payments in situations where it
is shown that the mortgage debt will be significantly reduced and result in sufficient equity build up,
thereby indicating a significant likelihood that the debtor could obtain refinancing of the property.
In re Tornheim, 239 B.R. at 683 n.5. The court in Gillis found that there was a reasonable likelihood
of success where the balloon payment would require the debtors to refinance their $780,000 home,
in which they had at least $180,000$640,000, with a back-up plan of a sale for a net of at least $640,000 after real estate commissions.
In re Gillis, 333 B.R. at 510. The court found that even in the event of a downturn in the market,
the debtors were reasonably likely to be able to obtain the new mortgage or sell the home for the
required amount. Id. at 910.home
mortgage, the debtor will begin the plan not with $180,000 in equity, butStrober. Principal amortization during a three-to-five year plan will likely be small, and thus the
debtor would need to refinance with nearly a one hundred percent loan-to-value ratio, assuming
there is no change in the value of the home. A court should have difficulty concluding five years in
advance that a debtor is reasonably likely to be able to refinance the home at such a level, or that
there is credible and definite evidence that the debtor will be able to do so, or that it is reasonably
certain the debtor will be able to do so, whichever of the formulations may be applied. Relevant
case law provides no support for balloon payments in circumstances such as those presented here,
i.e., plans requiring the payment of a large sum at the end with no source of funding for the payment
in sight. In re Felberman, 196 B.R. 678, 688 (Bankr. S.D.N.Y. 1995). One court did find such a
plan to be feasible with regard to a stripped down mortgage where a bank president testified that his
bank would provide the refinancing when the balloon payment came due, standards were met; the court considered that commitment to be not illusory though also not
s. 1991). The court in Groff was impressed
by the debtors family lifestyle, resiliency and sheer determination, id. at 709, and concluded that
ic shot at making it whileBank's interest, they should be given that opportunity. Id. No005 amendments to the Bankruptcy Code preclude
use of balloon payments. See 1325(a)(5)(B) (iii)(I) (requiring that if periodic payments are made
on a secured claim, such payments shall be in equal monthly amounts).
3 plan calling for a balloon paymentconfirmed, see Magnolia Mortgage, LLC v. Arnett (In re Arnett), 278 B.R. 239 (S.D. Ala. 2002); In
re Nation, 352 B.R. at 656. Neither Arnett nor Nation dealt explicitlypermissible to use a balloon payment to satisfy 1325(a)(5)(B) .
n dealt with discharge issues under a plan that had been confirmed and
that called for a balloon payment offirst mortgage on the
debtors home, which was worth well over $100,000. The plan as modified called for sale of the
home to generate the cash for the balloon payment, and it is hardly surprising that the bankruptcy
courtin an unpublished orderfound that it would be feasible to sell$100,000 for at least $30,000; as it turned out, the home was sold for $160,000.
e the district court in Arnett was how to interpret 1322(c)(2).Arnett, 278 B.R. at 240. The terms of the undersecured second mortgage on the debtors principal
residence required that it be paid off by a balloon payment on December 1, 2005. Id. at 241. The
debtor filed a Chapter 13 case in 2001, and the last payment under the debtors plan would be made
after December 1, 2005. Id. at 240. Thus, the district court correctly held that under 1322(c)(2)
the short-term mortgage exception to thecould be stripped down so long as the full amount of the stripped down secured claim was paid off
with interest during the term of the debtors plan. See In re Arnett, 278 B.R. at 242. The confirmed
plan stripped down the second mortgage to the value of the second mortgage holders collateralthe
value of the home minus the amount of the first mortgageprovided for monthly payments at the
contractual rate of interest, and provided for a balloon payment to be made on December 1, 2005 to
pay off the remaining principal owed on the stripped down secured claim.author that the plan should have been confirmed, given the uncertainty in whether the debtor would
be able to make the balloon payment. But note that the original mortgage payment schedule called
for a balloon payment on the same date as the date set under the plan, and the amount of the balloon
payment under the original terms of theamount of the balloon payment to be made under the plan. Thus, it does not seem that the risk of
nonpayment of the balloon payment was increased by the plan over the risk that would have existed
in any event; perhaps the reduced amount of the balloon payment under the plan, and the ability of
the debtor under the plan to reducere likely that the debtor
would be able to make the balloon payment.
[end of overlong footnote]
________________________________
Sent: Fri 5/28/2010 1:55 PM
Subject: [Bankr-L] Lump sum payment to secured creditor in Chapter 13
I have filed a chapter 13 in which debtors are seeking to retain a second home whose value is less than the first mortgage. The plan proposes to strip off the second DT (this has been completed), and strip down the first DT through valuation of the collateral, and claim bifurcation (this has been completed). The remaining secured claim of the first mortgage holder is to be paid in full through equal monthly payments for 60 months and a lump sum payment with the 60th payment. The periodic payments are each the same and based upon 30 year amortization of the secured claim at 4.75% interest. The lump sum payment, which will be made from the sale or refinance of the property, is the remaining balance on the secured claim after the 60 monthly payments of principal and interest. The creditor now has objected to the confirmation of the plan based on 11 USC 1325(a)(5)(B) (iii)(I) which provides that property to be distributed to pay secured claims must
be in equal amounts. Their argument is that the plan does not pay in equal amounts because of the lump sum payment at the end.
It appears that the code section cited was included in BAPCPA mainly to provide secured creditors with adequate protection. Arguably, the plan does adequately protect the creditor because they are being paid interest on their secured claim, together with principal to protect against decreases in the value of the collateral. Has anyone recently briefed this issue, or have within easy reach cases which support the use of a lumpsum payment in these circumstances depsite 11 USC 1325(a)(5)(B) (iii)(I)?
Law Offices of Dennis R. Wheeler
2358 Market Street, 2nd Floor
San Francisco, CA 94114
415-865-0212 (Office)
415-789-4284 (Fax)
dennis@dwheelerlaw. com(Email)
dwheelerlaw. com(Website)
1325(a)(1)(B)(iii) is clear, "If property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts" (emphasis added).
Attempting to read in the possibility of a final payment that is somehow not a periodic payment, seems to me to be too big of a stretch. Cases cited in the footnote regarding possible balloon payments appear to be exclusively pre-BAPCAP, before BAPCPA added (B)(iii) arguably closing the door on the possibility of a ballon payment no matter what the source and reagardless of the adequate protection provided to the lender in the value of the collateral or the amount of the periodic payments. Peter M. Lively, JD/MBALaw Office of Peter M. Lively * Personal Financial Law Center I11268 Washington Blvd, Suite 203, Culver City, CA 90230-4647Telephone: (310)391-2400 * (800)307-3328 * Fax: (310)391-2462 A-Bankruptcy-Attorney.comPersonal Financial Law Center II - Costa Mesa, CA
THIS MESSAGE IS INTENDED ONLY FOR THE USE OF THE INDIVIDUAL OR ENTITY TO WHICH IT IS ADDRESSED, AND MAY CONTAIN INFORMATION THAT IS PRIVILEGED, CONFIDENTIAL AND EXEMPT FROM DISCLOSURE UNDER APPLICABLE LAW. IF THE READER OF THIS MESSAGE IS NOT THE INTENDED RECIPIENT, OR THE EMPLOYEE OR AGENT RESPONSIBLE FOR DELIVERING THE MESSAGE TO THE INTENDED RECIPIENT, YOU ARE HEREBY NOTIFIED THAT ANY DISSEMINATION, DISTRIBUTION OR COPYING OF THIS COMMUNICATION IS STRICTLY PROHIBITED. IF YOU HAVE RECEIVED THIS COMMUNICATION IN ERROR, PLEASE NOTIFY US IMMEDIATELY BY E-MAIL OR BY TELEPHONE. THANK YOU.
From: David A. Tilem <DavidTilem@TilemLaw.com>To: cdcbaa@yahoogroups.comSent: Tue, June 1, 2010 8:15:32 AMSubject: [cdcbaa] FW: Lump sum payment to secured creditor in Chapter 13
Response to an earlier interesting post about balloon payments in C13 plans.
Mark Scarberry is the bankruptcy professor at Pepperdine and a frequent contributor of scholarly articles
Peter Lively has already commented on this - others may want to join in.
certain the debtor will be able to do so, whichever of the formulations may be applied. Relevant case law provides no support for balloon payments in circumstances such as those presented here, i.e., plans requiring the payment of a large sum at the end with no source of funding for
the payment in sight. In re Felberman, 196 B.R. 678, 688 (Bankr. S.D.N.Y. 1995). One court did find such a plan to be feasible with regard to a stripped down mortgage where a bank president testified that his bank would provide the refinancing when the balloon payment came due, if his banks underwriting standards were met; the court considered that commitment to be not illusorysp; In re Groff, 131 B.R. 703 (Bankr. E.D. Wis. 1991). The court in Groff was impressed by the debtors family lifestyle, resiliency and sheer determination, id. at 709, and concluded that ecause the debtors have a realistic shot at making it while at the same time protecting the
Bank's interest, they should be given that opportunity. Id. No other case found has used the
realistic shot test. It is also possible that the 2005 amendments to the Bankruptcy Code preclude use of balloon payments. See 1325(a)(5)(B) (iii)(I) (requiring that if periodic payments are made on a secured claim, such payments shall be in equal monthly amounts).
For other reported cases in which a Chapter 13 plan calling for a balloon payment was confirmed, see Magnolia Mortgage, LLC v. Arnett (In re Arnett), 278 B.R. 239 (S.D. Ala. 2002); In re Nation, 352 B.R. at 656. Neither Arnett nor Nation dealt explicitly with whether it was permissible to use a balloon payment to satisfy The opinion in Nation dealt with discharge issues under a plan that had been confirmed and that called for a balloon payment of approximately $30,000 to pay off a first mortgage on the debtorfied called for sale of the home to generate the cash for the balloon payment, and it is hardly surprising that the bankruptcy courtin an unpublished orderfound that it would be feasible to sell a home worth well over $100,000 for at least $30,000; as it turned out, the home was sold for $160,000.
The only issue before the district court in Arnett was how to interpret 1322(c)(2). See In re Arnett, 278 B.R. at 240. The terms of the undersecured second mortgage on the debtors principal residence required that it be paid off by a balloon payment on December 1, 2005. Id. at 241. The debtor filed a Chapter 13 case in 2001, and the last payment under the debtors plan would be made after December 1, 2005. Id. at 240. Thus, the district court correctly held that under 1322(c)(2)the short-term mortgage exception to the other than clause, see infra note 150the mortgage could be stripped down so long as the full amount of the stripped down secured claim was paid off with interest during the term of
the debtors plan. See In re Arnett, 278 B.R. at 242. The confirmed plan stripped down the second mortgage to the value of the second mortgage holders collateralthe value of the home minus the amount of the first mortgageprovided for monthly payments at the contractual rate of interest, and provided for a balloon payment to be made on December 1, 2005 to pay off the remaining principal owed on the stripped down secured claim. Id. It is not clear to the author that the plan should have been confirmed, given the uncertainty in whether the debtor would be able to make the balloon payment. But note that the original mortgage payment schedule called for a balloon payment on the same date as the date set under the plan, and the amount of the balloon payment under the original terms of the mortgage would have been
larger that the stripped down amount of the balloon payment to be made under the plan. Thus, it does not seem that the risk of nonpayment of the balloon payment was increased by the plan over the risk that would have existed in any event; perhaps the reduced amount of the balloon payment under the plan, and the ability of the debtor under the plan to reduce payments on other debts, made it more likely that the debtor would be able to make the balloon payment.
[end of overlong footnote]
From: Bankruptcy law discussion list on behalf of DennisSent: Fri 5/28/2010 1:55 PMSubject: [Bankr-L] Lump sum payment to secured creditor in Chapter 13
I have filed a chapter 13 in which debtors are seeking to retain a second home whose value is less than the first mortgage. The plan proposes to strip off the second DT (this has been completed), and strip down the first DT through valuation of the collateral, and claim bifurcation (this has been completed). The remaining secured claim of the first mortgage holder is to be paid in full through equal monthly payments for 60 months and a lump sum payment with the 60th payment. The periodic payments are each the same and based upon 30 year amortization of the secured claim at 4.75% interest. The lump sum payment, which will be made from the sale or refinance of the property, is the remaining balance on the secured claim after the 60 monthly payments of principal and interest. The creditor now has objected to the confirmation of the plan based on 11 USC 1325(a)(5)(B)
(iii)(I) which provides that property to be distributed to pay secured claims must be in equal amounts. Their argument is that the plan does not pay in equal amounts because of the lump sum payment at the end.
It appears that the code section cited was included in BAPCPA mainly to provide secured creditors with adequate protection. Arguably, the plan does adequately protect the creditor because they are being paid interest on their secured claim, together with principal to protect against decreases in the value of the collateral. Has anyone recently briefed this issue, or have within easy reach cases which support the use of a lumpsum payment in these circumstances depsite 11 USC 1325(a)(5)(B) (iii)(I)?
Law Offices of Dennis R. Wheeler 2358 Market Street, 2nd Floor San Francisco, CA 94114 415-865-0212 (Office) 415-789-4284 (Fax)
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