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Debtors Filing For Chapter 13 Bankruptcy Can Cramdown Their Home Mortgage

BREAKING NEWS –the 4th Circuit in Hurlburt v. Black, No. 17-2449 (4th Cir. 2019) ruled that debtors filing for chapter 13 bankruptcy can cramdown their home mortgage if the home mortgage matures before their last chapter 13 payment due date.

On May 24, 2019, the 4th Circuit Court of Appeals — the federal appellate court for Maryland, North Carolina, South Carolina, Virginia and West Virginia — made a significant decision and overturned its precedent that can affect consumers filing for chapter 13 bankruptcy.

Up until the Hurlburt decision, the 4th Circuit precedent set by Witt v. United Cos. Lending Corp. 113 F.3d 508 (4th Cir. 1997) did not allow debtors filing for chapter 13 bankruptcy to bifurcate undersecured home mortgages loans into unsecured and secured portions and “cram-down” the unsecured portion under 11 U.S.C. § 1322(c)(2). Hurlburt overruled Witt and allows debtors filing under chapter 13 to cram-down home mortgages that mature prior to the final payment due under a chapter 13 plan.

Hurlburt began its analysis with a summary of 11 U.S.C. 1325(a)(5), which states that the court can only confirm a chapter 13 plan’s proposed treatment of a secured claim if one of these 3 conditions are met: “(1) “[t]he secured creditor accepts the plan,” (2) “the debtor surrenders the property securing the claim to the creditor,” or, (3) “the debtor invokes the so-called ‘cram down’ power.”” Hurlburt at 7.

The “cram-down” powers arise under 11 U.S.C. 506(a)(1) which provides that:

“[a]n allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim.”

Put another way, when an allowed secured claim is undersecured, such as when the property is worth less than the claim, Section 506 allows the claim to be bifurcated into two parts – a secured claim of the value of the property and an unsecured claim for the balance that is not secured. Id. at 8 (internal citations omitted). Once bifurcated, Section 1325(a)(5)(B) can be used to cram-down the bifurcated claim to its secured amount, which effectively strips that portion of the claim exceeding the property’s value. Id. at 8-9 (internal citations omitted).

The cram-down power, however, cannot be used in all undersecured claims. “Section 1322(b)(2) generally prohibits Chapter 13 discharge plans from “modify[ing] the rights of holders of secured claims . . . secured only by a security interest in real property that is the debtor’s principal residence.” 11 U.S.C. § 1322(b)(2) (emphasis added).” Id. at 9.

There is an exception to Section 1322(b)(2) under Section 1322(c)(2) which provides:

Notwithstanding subsection (b)(2) and applicable nonbankruptcy law… in a case in which the last payment on the original payment schedule for a claim secured only by a security interest in real property that is the debtor’s principal residence is due before the date on which the final payment under the plan is due, the plan may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title. 11 U.S.C. § 1322(c)(2), Id. at 10-11.

Hurlburt ruled that 11 U.S.C. § 1322(c)(2) allows modification not just of payment of claims (only payment schedule) but claims generally (including bifurcation, cram down and modification of interest rate). Id. at 11, 13. The 4th Circuit reasoned that:

  1. …the phrase “payment of the claim as modified” is most naturally read as permitting the modification of claims, not only payments;
  2. 1322(c)(2) prefatory phrase of “[n]otwithstanding subsection (b)(2)” indicates that Congress intended for Section 1322(c)(2) to be an exception to or limitation on Section 1322(b)(2)’s anti-modification provision; and, most significantly
  3. Section 1322(c)(2) provides that a Chapter 13 plan “may provide for the payment of the claim as modified pursuant to section 1325(a)(5) of this title.” 11 U.S.C. § 1322(c)(2) and that the “very essence of a [Section] 1325(a)(5) modification is the write down or ‘cramdown’ of a secured claim to the value of the collateral securing the debt.”

Hurlburt at 13-16.

Hurlburt dispensed with Witt’s legislative history as support for its interpretation of Section 1322(c)(2) and repeated that “silence in legislative history cannot defeat the better reading of the text and statutory context” (internal citations omitted). Hurlburt also reasoned that its decision does not overrule Nobelman v. Am. Sav. Bank, 508 U.S. 324, 328, 113 S. Ct. 2106, 2109, 124 L. Ed. 2d 228 (1993), as Nobelman construed Section 1322(b)(2), not Section 1322(c)(2).

Hurlburt has important implications for debtors filing for chapter 13 bankruptcy protection whose home mortgages mature before their final chapter 13 plan payment as it allows a modification of the entire claim, including payment duration, interest rate and cram-down of the claim to its secured portion for this subset of home mortgages.