Can the chapter 13 debtor modify their home loan? Sometimes says the 4th Circuit.

Thanks to Aki Koyama for steering us to this case.

 

Hurlburt v. Black (In re Hurlburt), — F. 3d —, 2019 WL —– (4th Cir. May 2019)

Issue:   May the chapter 13 debtors modify the mortgage on their home, i.e., strip it down, when the mortgage was due in full before the petition date?

Holding:   Yes under section 1322(c)(2).

The debtors’ chapter 13 plan proposed to bifurcate the mortgage on their home into a secured claim of $40,000 and an unsecured claim of $131,000.  The plan proposed to pay the secured portion in full during the Plan (I assume) and the unsecured portion zero percent, click here now to learn more about this kind of loans.  The debtor argued that they could modify the lien because the loan was due in full when the case was filed.  Section 1322(c)(2) says:

Notwithstanding subsection (b)(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.

The bank argued that the term “payment of the claim” meant the payments could be modified but did not mean that the claim itself could be modified.  The district court affirmed the bankruptcy court as did the 4th Circuit panel assigned to the case, both courts relying on a previous 4th Circuit opinion.  The 4th Circuit granted an en banc hearing and reversed.  “[W]e now align our circuit with every other court that has considered this issue.”

“[W]e find it significant that Section 1322(c)(2) includes the prefatory phrase ‘[n]otwithstanding subsection (b)(2),’ which indicates Congress intended for Section 1322(c)(2) to be an exception to or limitation on Section 1322(b)(2)’s anti-modification provision.  Put differently, ‘[t]he prefatory phrase ‘[n]otwithstanding subsection (b)(2)’ is . . . a plain statement that subsection (b)(2)’s prohibition on the modification of loans secured only by an interest in a debtor’s primary residence does not have any application to the class of claims that fall under § 1322(c)(2).’”

And “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.’”

The dissent argued that “the majority reads § 1322(c)(2) as completely overriding Nobelman with respect to an entire class of mortgages.”  “Nobelman interpreted § 1322(b)(2)’s anti-modification provision as prohibiting all three forms of modification for homestead mortgages.”

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