The general rule in Chapter 13 cases is that the first mortgage on the residence is protected by the antimodification provision of 11 USC 1322(b)(2). Accordingly, in virtually every case, a consumer Debtor has two choices when it comes to addressing the mortgage on their home. 1. They can surrender the property to the secured creditor., Or, they can “cure and maintain”, which means they can maintain the ongoing mortgage payments (either directly or through the trustee, depending on the district) and provide for the cure of any arrearages through the Chapter 13 plan.
Absent title defects or a manufactured home that was not converted to real estate, there usually are no options for the Debtor to modify the first mortgage.
However, there is one narrow class of first mortgages that may be modified. 11 USC 1322(c)(2) allows for the first mortgage to be modified if the last payment is due during the life of the Chapter 13 plan. So, mortgages that are at or near the end of their amortization that have a due date during the plan may be modified. When one considers that these loans are near their scheduled payoff, you would expect that most homes in that category have substantial equity, so cramdown isn’t at play.
But in the rare instance that the loan is nearly paid off, but the property value has diminished to an amount less than the balance, the Debtor may split the claim and pay the creditor a secured claim based on the value of the property, and treat the remainder of the claim as unsecured – the classic Cramdown.
Courts in the Sixth Circuit (where we cover Ohio, Kentucky and Michigan) and Seventh Circuit (Indiana) have long held that 1322(c)(2) allowed for this. However, in the Fourth Circuit (West Virginia), courts had followed a standard from In re Witt, 113 F.3d 508 (4th Cir. 1997), which only allowed the Debtor to modify the payment, but not the balance of the claim. In the 4th Circuit, the Debtor could only stretch out the balance over the plan, but not cramdown.
The Fourth recently reversed Witt, when it issued the en banc decision in Hurlburt v. Black, 925 F.3d 154 (4th Cir. 2019). Now, the Fourth Circuit is in line with the majority of other circuits and allows a cramdown on mortgages that mature during the life of the plan.
This narrow exception may impact a small amount of loans in a Creditor’s portfolio. But it can be significant in a given situation, especially with properties in areas that have seen sharp declines in values.
If you have any questions about Cramdowns or any other Bankruptcy issues, our team of attorneys stand ready to assist.