Cram Down That Old Home Loan
By James J. Haller, Esq.
Haller Law
Lincolnshire, Illinois
Section 1322(c)(2) which provides:
O
ccasionally clients will ask
whether they can reduce the
amount owed on their first
mortgage through bankruptcy. Don’t
say no. It is possible to cram down a first
mortgage under certain circumstances.
If the mortgage loan has already come
due or will come due over the next 3-5
years, your client may be able to pay
the fair market value of the property
instead of the total loan amount.
Authorities:
In 1992 the Supreme Court in
Nobleman v. American Sav. Bank, 508
U.S. 324 (1993) held that pursuant to
11 U.S.C. § 1322(b) the debtor could
not bifurcate the debt owed on their
residence to secured and unsecured
portions.
However, in 1994 Congress passed
the Bankruptcy Reform Act, after the
Nobleman decision. The Act was
intended to remedy “a number of
problematic court opinions construing
the Bankruptcy Code.” H.R. Rep. No.
103–835, at 32 (1994). Nobleman was
not listed among the 40 decisions.
However, the amendments added
24
CONSUMER BANKRUPTCY JOURNAL
Notwithstanding subsection (b)(2) and
applicable nonbankruptcy law— …
(2) 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.
Virtually every federal court has
found that Section 1322(c)(2) in
conjunction with the modification
provisions of Section 1325(a)(5) permit
the bifurcation of an undersecured
mortgage that becomes due prior to the
final payment due under a Chapter 13
plan. Second Circuit: In re Latimer, 395
B.R. 304 (Bankr. W.D.N.Y. 2008); In
re Olmo-Claudio, No. 8-16-71740-ast,
2017 Bankr. LEXIS 2473, at *1 (Bankr.
E.D.N.Y. Aug. 30, 2017); Third Circuit:
In re Golash, 428 B.R. 189, 190 (Bankr.
W.D. Pa. 2010); Fifth Circuit: In re
Sierra, 560 B.R. 296, 303 (Bankr. S.D.
Tex. 2016); In re Domingue, No. 11-
40437, 2012 Bankr. LEXIS 4182, at *7
(Bankr. S.D. Tex. Sep. 10, 2012); Sixth
Circuit: In re Eubanks, 219 B.R. 468
(BAP 6th Cir. 1998); Seventh Circuit: In
re Reeves, 221 B.R. 756, 760 (Bankr.
C.D. Ill. 1998); In re Tekavec, 476 B.R.
555, 556 (Bankr. E.D. Wis. 2012);
Eighth Circuit: In re Mattson, 210 B.R.
157, 159 (Bankr. D. Minn. 1997); Ninth
Circuit: Geller v. Grijalva (In re Grijalva),
No. 4:11-bk-25386-EWH, 2012 Bankr.
LEXIS 1355, at *1 (Bankr. D. Ariz. Apr.
2, 2012); Tenth Circuit: In re Duran, 271
Spring 2018
B.R. 888, 891 (Bankr. D. Wyo. 2001)
Eleventh Circuit: In re Paschen, 296
F.3d 1203 (11th Cir. 2002); Magnolia
Mortg., LLC v. Arnett (In re Arnett), 278
B.R. 239, 244 (S.D. Ala. 2002).
The exception to the universal
interpretation is the Fourth Circuit
Court of Appeals’ decision in In re Witt,
113 F.3d 508 (4th Cir. 1997). The Court
held that Section 1322(c)(2) allows a
modification of the payments due but
not a modification of the claim.
Steps to cram down the mortgage:
1) Review the note secured by
the residence and determine
whether the loan will come
due during the bankruptcy plan
(3-5 years).
2) Obtain evidence of the value
of the mortgage. The best
evidence is an appraisal. See
NACBA’s webinar on How
to Introduce and Appraiser’s
Testimony and Appraisal as
Evidence in Bankruptcy Court.
3) Propose in your plan that
the home mortgage will be
crammed down to value
pursuant to 11 U.S.C. § 1322(c)
(2). If the plan is not specific,
add a non-standard provision
to the plan.
A suggested
version is:
Bifurcation of the Mortgage Debt Owed
to ______________.
A. On
______________
the
note secured by the Debtor(s)
principle residence located at
_____________________is
National Association of Consumer Bankruptcy Attorneys