Homestead Mortgages: Modification in Chapter 13 Bankrupty Proceedings
§ 1322(b)(2) – SECURED ONLY BY A SECURITY INTEREST IN REAL PROPERTY THAT IS THE DEBTOR’S PRINCIPAL RESIDENCE
The homestead mortgage anti-modification provision of § 1322(b)(2) permits a chapter 13 plan to propose modifying the rights of secured and unsecured creditors EXCEPT as to a claim secured only by a security interest in real property that is the debtor’s principal residence.
On the broad side, some courts have gone so far to find that even a de minimus interest in property more than the principal residence strikes the anti-modification clause allowing bifurcation. In a much criticized decision, the Eastern District of Pennsylvania held that a security interest in fixtures, rents, insurance and the like is enough to strike the clause regardless of whether the additional security interests are located on, attached to, or are substantially related to the real property. See, Fleming and McConnell, The Treatment of Residential Mortgages in Chapter 13 After Nobleman, 2 Am. Bankr. Inst. L. Rev. 147, 148 (1994).
Taking a centric view, the Rhode Island District held that the determination of “secured only by a principal residence" should examine whether the secured interest is more than mere enhancement of real property and whether it has significant independent value. In re Gleckman, 212 B.R. 204 (Bankr.D.R.I. 1997); see also,In re French,174 B.R. 1, (Bankr.D.Mass. 1994)(independent value required to strike anti-modification clause.)
In the Massachusetts District it was held that a four-family structure where one unit is homesteaded by the debtor can be bifurcated into unsecured and secured portions. In re McGregor, 172 B.R. 718 (Bankr.D.Mass. 1994); Lomas Mortgage, Inc., v. Louis,82 F.3d 1 (1st Cir. 1996). Based on McGregor, it is widely accepted that any multi-family structures, including two-families, are secured by more that an interest in only a principal residence permitting modification of the homestead mortgage.
Dividing a single-residence in to a two-family after a mortgage is granted does not nullify the antimodification clause as it was not the intent of the lender to loan on a multi-family structure. In Re Scarborough, 461 F.3d 406 (3rd Cir. 2006)(look to the terms of the mortgage and nature of the collateral at the time the mortgage was granted.)
Some clarity is still required where a homestead mortgage includes an explicit security interest in tax and insurance escrows. InIn re Steslow, 225 B.R. 883 (Bankr.E.D.Pa. 1998) it was held that because state law defines escrows as personal rather then real property, the homestead mortgage was secured by more that real estate and was subject to bifurcation. Conversely, in In re Rodriquez, 218 B.R. 764 (Bankr.E.D.PA 1988), although escrows were personal rather than real property they were sufficiently intertwined with the real property to preclude bifurcation.
In In re French, 174 B.R. 1, (Bankr.D.Mass. 1994), one of the leading cases on the topic in Massachusetts, the court crafted a test based on “independent value. The Court held that, “additional collateral that is nothing more than an enhancement which is or can, by agreement of the parties, be made a component part of the real property or is of little or no independent value" does not result in the forfeiture by the lender of the anti-modification protections of § 1322(b)(2)).
From the above, it is evidence that a factual analysis is required to determine if additional collateral is sufficient to avoid the anti-modification clause. It is not always clear, and varies substantially between jurisdictions. Thus, special care must be taken when analyzing homestead mortgages as there are many variations that can allow modification of homestead claims.
§1325(a)(5)(B) versus § 1322(b)(5): FULL PAYOFF DURING LIFE OF CHAPTER 13 PLAN or MAINTENANCE OF PAYMENTS EXTENDING BEYOND THE TERMS OF THE PLAN
Section 1325(a)(5)(B)(ii) holds that the chapter 13 plan is confirmable if, “… the value, as of the effective date of the plan, or property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim . . ." Simply put, the note must be paid off within the life of the plan or property distributed to satisfy the debt, generally between the 3 to 5 year life of the plan. While possible in some cases, debtors generally do not have sufficient resources to pay off a homestead mortgage within the three or five year life of the plan.
Section 1322(b)(5) provides an alternative. A debtor can provide maintenance of payments thereby extending payments to the lender beyond the life of the plan. Maintenance of payments is held to be those payments as contemplated by the note.
Exactly what maintenance of payments requires is not entirely clear. It has been defined to mean payments as contemplated by the underlying note. Payments can not be pro rated or adjusted to account for a cram-down of the note (although the term of the note is shortened), nor can the interest rate be adjusted, unless the debtor is repaying the secured portion in full within the life of the plan. See, e.g., In re Plourde, 402 B.R. 488 (Bankr.D.N.H. 2009).
In In re Velize, the debtor bifurcated a mortgage loan secured by a multi-family principal residence. The loan was past due, and the plan provided cure payments. The debtor proposed to reduce the secured portion by the amount of the cure payments. The Court found the plan was not confirmable because arrearage payments are a “third component" of a bifurcated claim that is contemplated by the mortgage note. As such, they must be paid as part of the maintenance of payments.
In re McGregor, 172 B.R. 718 (Bankr.D.Mass. 1994) holds that adjusting the interest rate of the note in the plan does not constitute “maintenance of payments," and because the debtor’s plan did not propose payment in full within the five-year maximum the plan could not be confirmed.