Cramdown of Residential Mortgages in Chapter 13 Cases
| Jurisdiction | United States,Federal |
| Citation | Vol. 20 No. 5 Pg. 881 |
| Pages | 881 |
| Publication year | 1991 |
1991, May, Pg. 881. Cramdown of Residential Mortgages in Chapter 13 Cases
In a 1915 opinion and again in a 1934 opinion, the United States Supreme Court observed that one of the primary purposes of bankruptcy is to
relieve the honest debtor from the weight of oppressive indebtedness, and to permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.(fn1)
Under Chapter 13, individuals with a regular income can retain their property and adjust their debts through an extension or composition plan under the protection of the court.(fn2)
Congress promulgated the Bankruptcy Reform Act of 1978(fn3) seeking, in part, to stimulate the use of Chapter 13 as an alternative to liquidation under Chapter 7.(fn4) This article focuses on recent developments concerning lein stripping of residential mortgage loans in Chapter 13 cases pending in the 10th Circuit.
Section 1322(b)(2) of the Bankruptcy Code(fn5) ("Code") provides that a Chapter 13 plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in the principal residence of the debtor.(fn6) A Chapter 13 debtor may modify the claim of a creditor secured by any other real or personal property of the estate.(fn7) Similarly, a claim secured by the debtor's principal residence and a lien on additional tangible collateral such as fixtures,(fn8) household goods,(fn9) a farm(fn10) or a life insurance policy,(fn11) may be modified under Code § 1322(b)(2).(fn12)
Typically, a Chapter(fn13) debtor treats a default in the payment of a mortgage secured by his principal residence under Code §§ 1322(b)(3) and (5). The debtor may elect to pay the present value of the entire claim (both secured and unsecured portions) under the Chapter 13 plan. Alternatively, the debtor may reinstate the mortgage in full, maintain regular installment payments and cure any default under the plan without modifying a creditor's rights in violation of Code § 1322(b)(2).13
Code § 506(a)(fn14) establishes the extent to which a claim is a "secured claim" for bankruptcy purposes.(fn15) A claim is secured only to the extent of the value of the property on which the lien is fixed.(fn16) Thus, an undersecured claim may be bifurcated under § 506(a), leaving a creditor with a secured claim to the extent of the value of the collateral and an unsecured claim as to the deficiency.(fn17)
The value of the collateral is determined as of the date the petition was filed.(fn18) Courts in various jurisdictions are divided on the issue of whether a Chapter 13 debtor may bifurcate an undersecured claim secured only by the debtor's principal residence into secured and unsecured claims or whether such a bifurcation is an impermissible modification of the claim.(fn19)
Under the minority approach, Code § 1322(b)(2) requires allowance of a claim secured only by a security interest in the debtor's principal residence for the entire balance owing on such debt, regardless of the value of the collateral.(fn20) A Chapter 13 plan may not modify either the secured or unsecured portions of an undersecured creditor's claim if such creditor's only collateral is the debtor's home.(fn21)
Courts adopting the minority view have relied on the "plain meaning" of Code § 1322(b)(2), observing that Code § 104(4) defines "claim" to include both secured and unsecured claims. Therefore, they have concluded that § 1322(b)(2) precludes modification of a "claim" secured solely by a debtor's principal residence.(fn22) Such courts further reason that: (1) Code § 506 is a provision of general applicability to cases under Chapters 7, 11 and 13 by virtue of Code § 103(a);(fn23) and (2) the principles of statutory construction require the specific language of § 1322(b)(2) to prevail over the general application language of § 506.(fn24)
Finally, the minority of courts addressing this issue have concluded that the legislative intent behind Code § 1322 (b)(2) was to provide stability in the long-
term residential housing market(fn25) and that the application of Code §...
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