§ 85.2 — Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994

Revised: June 2, 2004

[1]

In 1994, Congress answered some questions and raised a few new ones about the management of short-term residential mortgages in Chapter 13 cases. The Bankruptcy Reform Act of 1994 added a new § 1322(c)(2) as follows:

Notwithstanding subsection [1322](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.1
[2]

In Chapter 13 cases filed after October 22, 1994, notwithstanding the protection from modification in § 1322(b)(2),2 § 1322(c)(2) permits a plan to provide for payment consistent with § 1325(a)(5)3 of any claim secured only by a security interest in real property that is the debtor’s principal residence if the last payment “on the original payment schedule” is due before the final payment under the plan. This amendment releases Chapter 13 debtors with short-term home mortgages from the trap described above.4

[3]

New § 1322(c)(2) also applies during the last five (or fewer) years of a home mortgage that had a longer original amortization schedule. In cases filed after October 22, 1994, Chapter 13 debtors can pay the remaining balance of a nearly completed long-term home mortgage through the plan pursuant to § 1325(a)(5).5

[4]

The prerequisites for use of new § 1322(c)(2) include that the “last payment on the original payment schedule” must be due before the final payment under the plan is due. The section obviously contemplates that there is an “original payment schedule.” In the typical Chapter 13 case, this won’t be a problem because most mortgages arise by contract and have some sort of repayment schedule that can be consulted. But this new phrase of art is not defined by the Bankruptcy Code, and its meaning is sure to be tested as the gatekeeper for access to the power in § 1322(c)(2).

[5]

Demand notes and notes that can be called at the holder’s option are a problem. Is the original payment schedule the monthly installments under one part of the note, or the time of the demand or call under another clause? If there has been no demand or call before the petition, it may be impossible to determine when the “last payment on the original payment schedule” is due. In In re Dandridge,6 the Chapter 13 debtor’s home mortgage had an original payment schedule with a last payment on May 21, 2021, and a five-year call provision that had not been validly exercised prior to the petition. The bankruptcy court held that the mortgage did not fit within § 1322(c)(2) but might have if the call had been exercised before the petition:

The phrase “original payment schedule” as used in Section 1322(c)(2) is not defined by the Bankruptcy Code. . . . In this case, there has been no acceleration or exercise of the call provision. . . . The presence of the call provision does not alter the Court’s conclusion that the last payment on the original payment schedule for the Note is due after the final payment under the plan. The call provision is distinguished from a “balloon” provision, in which a longer amortization schedule is used to calculate regular monthly payments under a note, but the note provides for maturity, according to its original terms, on a specified date before the note would be fully paid according to the schedule of payments. Had the call been exercised before the Debtor’s petition was filed, the Court’s conclusion also might have been different. In that case, it could be argued that upon exercise of the call provision, the debt had become a short-term Section 1322(c)(2) debt, which would have to be paid in full over the life of the plan.7
[6]

Other home mortgages won’t have obvious repayment schedules. For example, in In re Perry,8 the debtor was obligated to a homeowner’s association for assessments for maintenance fees contained in recorded declarations. The fees were assessed annually, but there was no payment schedule of the traditional sort contemplated by § 1322(c)(2). To find a payment schedule, the district court looked to the underlying covenants and found a provision that “the covenants and restrictions . . . run with and bind the land, for a term of twenty (20) years from the date this Declaration is recorded, after which time they shall be automatically extended for successive periods of ten (10) years.”9 Because the covenant extended beyond the term of the plan, the debtor was refused use of § 1322(c)(2) to make up the unpaid maintenance fees. On similar facts but applying different logic, the U.S. Court of Appeals for the Fifth Circuit reached a similar conclusion that a homeowner’s association maintenance assessment does not fall within the reach of § 1322(c)(2):

[C]ourts apply § 1322(c)(2) solely to claims arising from mortgages that mature prior to the expiration of a debtor’s chapter 13 plan. . . . the better reading is that ‘the “last” payment due under the original schedule in § 1322(c)(2) refers to the “final” payment and not the most recent payment.’ . . . [T]he one-time yearly assessment cannot properly be characterized as having an ‘original payment schedule’ similar to that of a mortgage. . . . The assessment is calculated each year and comes due upon assessment. The payment of the assessment does not pay down an existing debt. Thus, adoption of Debtor’s interpretation would render the ‘original payment schedule’ language superfluous. . . . [W]e hold that an annual assessment due upon assessment does not meet the requirements of § 1322(c)(2).10
[7]

Nonconsensual short-term liens on a debtor’s principal residence—for example, tax liens, statutory liens and judgment liens—typically do not have repayment schedules; but such liens are not security interests and can be modified under § 1322(b)(2) without resort to the new powers in § 1322(c)(2).11

[8]

New section 1322(c)(2) is not a model of clarity with respect to mortgages that matured, ballooned or were subject to demand before the petition. The last payment “on the original payment schedule” for such a mortgage would certainly be due before the final payment under the plan—the last payment was due before the borrower became a Chapter 13 debtor. The curing default language in § 1322(b)(3) and (b)(5) has always been interpreted to permit Chapter 13 debtors to fix other prepetition monetary defaults. The failure to pay a prepetition matured, ballooned or demanded amount would comfortably fit in the same logic. If § 1322(c)(2) does not apply when the mortgage reached maturity, was subject to demand or ballooned before the petition, then its usefulness is severely restricted in ways not discussed in the legislative history.12 Most, but not all, decisions interpreting § 1322(c)(2) have concluded that a mortgage matured or ballooned before the petition can be paid in full through the plan.13

[9]

This outcome finds some support in the 1994 amendments to § 1322(c)(1). Discussed in more detail elsewhere,14 in 1994 Congress enacted § 1322(c)(1) to allow Chapter 13 debtors to cure home mortgage defaults under § 1322(b)(3) and (b)(5) so long as the residence has not been sold at a foreclosure sale prior to the petition. Section 1322(c)(1) defines the outer limits on a Chapter 13 debtor’s power to cure home mortgage defaults by focusing on whether the petition was filed before a foreclosure sale was conducted under state law. It has not been particularly effective as a boundary on curing default under § 1322(b)(3) or (b)(5).

[10]

The question is, what boundary applies to the power of Chapter 13 debtors to manage short-term contracts under § 1322(c)(2)? Put another way, at what point in the deterioration of a short-term mortgage does the debtor lose the power in § 1322(c)(2) to provide for payment of the claim as modified under § 1325(a)(5)?

[11]

Does the boundary in § 1322(c)(1) also apply to the power to pay a short-term mortgage in full under § 1322(c)(2)? There is no cross-reference in § 1322(c)(1) to § 1322(c)(2) notwithstanding the two sections were enacted at the same time. There are cross-references in § 1322(c)(1) to curing default under § 1322(b)(3) and (b)(5)—indicative that Congress intended the focus on curing default in § 1322(c)(1). Section 1322(c)(2) is not about “curing default”; it is about providing for “the payment of the claim . . . pursuant to § 1325(a)(5).” There is little in the way of ordinary canons of statutory interpretation to support the view that § 1322(c)(1) was intended to define the limit on the use of the new power in § 1322(c)(2).

[12]

This is unfortunate. It would be reasonable to conclude that the power to manage a short-term mortgage under § 1322(c)(2) should be at least co-extensive with the power to cure default and maintain payments with respect to a long-term mortgage—both should be available at least so long as the petition is filed before a foreclosure sale is conducted under state law. If a boundary like that in § 1322(c)(1) is not applied to § 1322(c)(2), then it is not obvious what limits will be applied. It certainly should be true that if a short-term mortgage has only matured or ballooned before the petition and has not reached foreclosure sale, debtors can pay the mortgage in full through the plan under § 1322(c)(2). Any rule fixing a limit on the use of § 1322(c)(2) earlier than maturity or the date of a balloon would be inconsistent with the developing case law cited above interpreting § 1322(c)(2) to permit the payment in full through the Chapter 13 plan of a mortgage that matured or ballooned through the petition. Also, as discussed below,15 aligning the limits on the power to cure default under § 1322(c)(1) with the limits on the power to pay short-term home mortgages in full through the plan under § 1322(c)(2) would be consistent with congressional intent in 1994 to empower Chapter 13 debtors to deal with residential mortgages that had been reduced to a prepetition foreclosure judgment.

[13]

Section 1322(c)(2) is controversial with respect to what a Chapter 13 debtor can do with a home mortgage that falls within its reach. Section 1322(c)(2) begins, “Notwithstanding subsection (b)(2) and applicable nonbankruptcy law. . . .”16 The “subsection (b)(2)” cross-reference is 11 U.S.C. § 1322(b)(2)—the section of the Code that prohibits modification of claims secured only by real property that is the debtor’s principal residence.17 On its face, § 1322(c)(2) is an exception to the antimodification provision of § 1322(b)(2). Any home mortgage within its reach can be modified by a Chapter 13 plan in the usual ways permitted by the Bankruptcy Code—including bifurcation and cramdown, consistent with § 1325(a)(5).18 This interpretation of § 1322(c)(2) renders § 1322(b)(2) and Nobelman inapplicable to home mortgages on which the “last payment on the original payment schedule” is due before the final payment under the plan. This outcome was convincingly defended in In re Young19 and has been embraced by a majority of courts, including the U.S. Court of Appeals for the Eleventh Circuit.20

[14]

In Young, the debtor valued the residence at $50,000. A first mortgage holder filed a proof of claim for $43,573.54. A second mortgage holder had a claim for $13,000. The plan treated the unsecured portion of the second mortgage as an unsecured claim to be paid approximately 20 percent. The second mortgage holder argued that this stripdown of its mortgage violated the antimodification provision in § 1322(b)(2) as interpreted by the Supreme Court in Nobelman. The bankruptcy court disagreed because the last scheduled payment under the second mortgage became due before the final payment under the plan, and § 1322(c)(2) permitted modification:

11 U.S.C. § 1322(c) indicates that the claim described therein may be modified “[n]otwithstanding subsection (b)(2),” and because § 1322(b) has been made expressly subject to subpart (c), it is logical to conclude that subsection (c)(2) provides an exception to the general prohibition on home mortgage modifications for those mortgages where the last payment happens to fall due during the life of the plan. . . . The very essence of a § 1325(a)(5) modification is the write down or “cramdown” of a secured claim to the value of the collateral securing the debt. . . . Valuation of the allowed secured claim pursuant to § 506(a) is the first step in a “cramdown” under § 1325(a)(5) and thus, is integral to the process. . . . Because of this interaction, it is irrelevant that § 1322(c)(2) does not refer to § 506(a) when it states that a claim can be modified under § 1325(a)(5). . . . [Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992)] . .  . has no effect on this analysis. . . . The Supreme Court expressly limited its ruling to liquidation cases. . . . Dewsnup’s premise that pre-Code law did not permit the voluntary reduction of the amount of a creditor’s lien does not apply to reorganization cases. . . . [U]nlike the legislative history of § 506(d), the legislative history of § 1325(a)(5) unequivocally establishes Congress’ intent to permit the bifurcation and modification of a creditor’s lien. . . . Literal application of § 1322(c)(2) . . . will, of course, overrule [Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993)] with respect to any home mortgage whose remaining term is less than the life of the chapter 13 plan. . . . Nobelman was based solely on the prohibition on home mortgage modification set forth in § 1322(b)(2). . . . The contrary implication is clear: absent § 1322(b)(2)’s protection, “cramdown” of an undersecured home mortgage under § 1325(a)(5)(B) would be permitted. . . . [T]he legislative history to § 1322(c)(2) gives no indication that Congress intended to reverse any aspect of Nobelman, nor is bifurcation or “cramdown” even addressed. . . . Literal application of § 1322(c)(2) in the manner proposed by the debtors does not produce a result that is “demonstrably at odds with the intention of the drafters.” . . . [T]he literal application of § 1322(c)(2) will permit the “cramdown” of not only short-term home mortgages (less than five years) and balloon payments, but also the traditional long-term mortgages . . . which have less than five years remaining under the terms of the loan.21
[15]

The U.S. Court of Appeals for the Fourth Circuit disagrees with Young. In Witt v. United Companies Lending Corp. (In re Witt),22 the debtor proposed to bifurcate an undersecured mobile home lender’s claim that would mature during the five-year plan. The bankruptcy court confirmed the plan. On appeal, the Fourth Circuit found § 1322(c)(2) to be ambiguous and reconstructed the phrasing to only permit modification of the payment amount:

[W]e find the language of § 1322(c)(2)—“payment of the claim as modified”—to be ambiguous. . . . We recognize that under the “rule of the last antecedent,” a phrase should be read to modify its immediate antecedent. . . . According to this rule, the phrase “as modified” would apply to its immediate antecedent, “claim.” However, although this reading may be “quite sensible as a matter of grammar,” we find, as did the [Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993)] Court (in interpreting another section, § 1322(b)(2)), that such a reading “is not compelled.” Id. In the section we must interpret, § 1322(c)(2), the term “claim” is part of the phrase “of the claim,” which modifies “payment.” It is quite plausible as a matter of common sense, we believe, that the phrase “as modified” also modifies “payment” and not “claim.” . . . Thus, § 1322(c)(2) was only intended to allow payments to be stretched out over time; the debtor is still required to pay the “full amount of the allowed secured claim.” . . . Had Congress intended to overrule Nobelman, we expect Congress would have discussed that in the legislative history.23
[16]

This disagreement in interpretation of § 1322(c)(2) is likely to produce a great deal of litigation. If Young prevails, any undersecured home mortgage with a last payment due before the final payment under the plan will be subject to bifurcation and cramdown in a Chapter 13 case. If more narrowly interpreted as in Witt, § 1322(c)(2) permits Chapter 13 debtors to modify the payment terms of a home mortgage within its reach, but the debtor must pay the entire mortgage through the plan, without regard to whether the claim would be fully secured after analysis under § 506(a). The Witt holding limits the use of new § 1322(c)(2) to Chapter 13 cases in which the debtor is financially able to retire the entire short-term home mortgage during the life of the plan.

[17]

Under either interpretation, in Chapter 13 cases filed after October 22, 1994, if the debtor is able, new § 1322(c)(2) permits payment in full of a short-term mortgage pursuant to § 1325(a)(5). Also, even with respect to a short-term mortgage that would otherwise be protected from modification by § 1322(b)(2), § 1322(c)(2) should allow surrender in full satisfaction of the secured claim consistent with § 1325(a)(5)(C).24

[18]

Debtors will not always prefer to use § 1322(c)(2) to manage a short-term mortgage. For example, if confirmation interest rates are higher than the interest rate in the mortgage contract, managing the claim under § 1322(c)(2) consistent with § 1325(a)(5) may be less favorable to the debtor than curing default and reinstating the original contract under § 1322(b)(3).25


 

1  11 U.S.C. § 1322(c)(2), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 301, 108 Stat. 4106 (1994).

 

2  See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

3  See § 74.11  The Power to Modify.

 

4  See § 142.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994 ] § 85.1  Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994.

 

5  See In re Young, 199 B.R. 643, 653 (Bankr. E.D. Tenn. 1996) (“[L]iteral application of § 1322(c)(2)” includes “not only short-term home mortgages (less than five years) and balloon payments, but also the traditional long-term mortgages . . . which have less than five years remaining under the terms of the loan.”).

 

6  221 B.R. 741 (Bankr. W.D. Tenn. 1998).

 

7  221 B.R. at 748.

 

8  235 B.R. 603 (S.D. Tex. 1999).

 

9  235 B.R. at 609.

 

10  Bartee v. Tara Colony Homeowners Ass’n (In re Bartee), 212 F.3d 277, 295–96 (5th Cir. 2000).

 

11  See § 119.2 [ Statutory Liens and Judgment Liens, Including Foreclosure Judgments ] § 80.2  Statutory Liens and Judgment Liens, Including Foreclosure Judgments.

 

12  See below in this section.

 

13  See In re Kelly, 283 B.R. 808 (Bankr. M.D. Fla. 2002) (Mortgage that ballooned before the petition can be paid in full through the plan under § 1322(c)(2) as amended in 1994.); In re Dasher, No. 00-60397-JTL, 2000 WL 33743082, at *2 (Bankr. M.D. Ga. Oct. 27, 2000) (unpublished) (“[Section] 1322(c)(2) allows debtors to provide a creditor with payment of a prepetition matured balloon over the life of the Plan.”); In re Ibarra, 235 B.R. 204, 211 (Bankr. D.P.R. 1999) (“[T]he courts that have addressed the issue of whether 11 U.S.C. § 1322(c)(2) applies to matured or ballooned mortgage obligations have all answered in the affirmative. This Court also finds that section 1322(c)(2) allows Debtor in the instant case to provide Creditor with payment of the debt over the life of the Chapter 13 plan. The legislative history, the stated objectives of Chapter 13, and Congress’ preference for a Chapter 13 filing rather than a Chapter 7, show Congressional intent to allow debtor to cure a debt secured only by debtor’s residence by full payment through the plan, when the last payment under the original obligation came due prior to the commencement of the bankruptcy.”); In re Reeves, 221 B.R. 756, 756–57 (Bankr. C.D. Ill. 1998) (Chapter 13 debtor can bifurcate a note that ballooned and became payable before the filing of the Chapter 13 petition. Mortgage note for $91,400 ballooned on September 14, 1997. Petition was filed on October 27, 1997. Plan provided $702.79 per month for 60 months to the mortgage holder with a balloon payment five years after confirmation “at which time Debtors would find alternative financing to pay off the balance of the mortgage debt. . . . Claimant does not deny that its mortgage falls within the scope of § 1322(c)(2) in that its mortgage came due prior to the filing of the petition in bankruptcy.”); In re Miller, 191 B.R. 487, 489 (Bankr. S.D. Fla. 1995) (“[D]ebtor can modify and pay off a mortgage during the term of the Debtors’ plan which fully matured prepetition.”); In re Watson, 190 B.R. 32, 36–37 (Bankr. E.D. Pa. 1995) (“[T]he obvious purpose of § 1322(c)(2) was to serve as the antidote for the theory that § 1322(b)(2) barred the cure of a residential mortgage obligation which matured pre-petition.”); In re Sarkese, 189 B.R. 531, 535 (Bankr. M.D. Fla. 1995) (Applying new § 1322(c)(2), debtor can pay in full with interest the allowed secured claim of a purchase money mortgage holder where underlying note ballooned before the petition. “[S]ection 1322(c)(2) allows the debtors in this case to provide McWilliams with payment of the ballooned mortgage over the life of the Chapter 13 plan. . . . [O]ne of the three alternatives provided in section 1325(a)(5) must be satisfied to utilize section 1322(c)(2).”); In re Jones, 188 B.R. 281, 284 (Bankr. D. Or. 1995) (Section 1322(c)(2) permits a Chapter 13 debtor to pay in full (with interest) a real estate-secured claim that matured prior to the petition. Seidel v. Larson (In re Seidel), 752 F.2d 1382 (9th Cir. 1985) is overruled. “[G]iven the policy of supporting the debtor’s attempts to retain his residence which pervades this new section there is no reasonable basis to assume that Congress intended that creditors whose mortgages may have matured by their own terms just prior to a Chapter 13 filing would not be prohibited by the filing from pursuing their nonbankruptcy rights while those creditors whose mortgages matured by their own terms just after the bankruptcy filing would be required to receive payments on the mortgage through the plan.” Debtor must pay fully matured obligation during the life of the plan and must include a discount factor. Failure to provide interest precludes confirmation.); In re Chang, 185 B.R. 50, 53 (Bankr. N.D. Ill. 1995) (Section 1322(c) permits the debtor to pay in full a mortgage that ballooned prior to the filing. “The [Bankruptcy Reform Act of] 1994 amended the Bankruptcy Code to permit modification of claims secured only by a security interest on the debtor’s principal residence when the last payment on the original payment schedule is due before the date on which the final payment under the plan is due. Although the debtor cannot extend the mortgage term indefinitely, the debtor can pay the mortgage balance over the life of the Chapter 13 plan, a period which may be as long as five years. . . . The new provision, by specifically permitting cure under § 1322(b)(3), notwithstanding § 1322(b)(2), implicitly overrules cases such as Seidel v. Larson (In re Seidel), 752 F.2d 1382 (9th Cir. 1985).”); In re Escue, 184 B.R. 287, 293 (Bankr. M.D. Tenn. 1995) (Although § 1322(c)(2) as enacted in 1994 is not perfectly clear, debtor can pay mortgage in full through the plan notwithstanding that it fully matured prior to the petition. “[T]his Court concludes, that based upon the legislative history, the stated objectives of Chapter 13, and Congress’ preference for a Chapter 13 filing rather than a Chapter 7, that Congress intended to allow debtors to cure a mortgage indebtedness which matured or ballooned prepetition by providing for full payment to the mortgagee over the life of the Chapter 13 Plan.”). But see In Haman, 190 B.R. 358, 360–61 (Bankr. E.D. Mo. 1995) (Section 1322(c)(2) does not apply to a mortgage that matured prior to the petition; however, § 1322(c)(1) does apply and permits debtor to “cure the default” by paying matured mortgage in full over the life of the Chapter 13 plan. “Prior to the enactment of § 1322(c), a debtor seeking to cure the default on a note secured by a principal residence was forced to cure that default under § 1322(b)(5) because it was the sole exception to § 1322(b)(2)’s prohibition against modifying the rights of claims ‘secured only by a security interest in real property that is the debtor’s principal residence.’ With the enactment of § 1322(c)(1), Congress for the first time permitted mortgagors of a ‘principal residence’ secured debt an alternative to the § 1322(b)(2) modification prohibition. It permitted the § 1322(b)(3) cure provisions. Most importantly, Congress gave the debtor a choice when it codified the language ‘may be cured under paragraph (3) or (5).’ . . . The Court concludes that Debtor’s default on her note which matured pre-petition by its terms may be cured under § 1322(b)(3) which allows curing over the forty five (45) month period as provided in the Debtor’s plan. . . . Section 1322(b)(3) allows the debtor to cure the debt without limitation to the ‘reasonable time’ restriction of § 1322(b)(5). . . . In [In re Escue, 184 B.R. 287 (Bankr. M.D. Tenn. 1995),] and in [In re Jones, 188 B.R. 281 (Bankr. D. Or. 1995)], the bankruptcy courts utilized § 1322(c)(2) when determining whether a debtor may cure a pre-petition matured note through the Chapter 13 plan. In each case, the court conceded that § 1322(c)(2) did not literally apply to the facts before it, yet each court determined the Congressional intent behind the enactment of § 1322(c)(2) and allowed the debtor to cure the default on a note which matured pre-petition. . . . [I]t is unnecessary to refer or to apply § 1322(c)(2) when dealing with a note which matured prior to filing, such as the instant case. Section 1322(c)(2) applies to cases ‘in which the last payment on the original payment schedule for . . . is due before the date on which the final payment under the plan is due.’ Such is clearly not the case when the note matures pre-petition, and the Court therefore concludes that § 1322(c)(2) does not apply.”).

 

14  See § 130.1 [ Prepetition Defaults ] § 82.1  Prepetition Defaults—When is Property “Sold” at Foreclosure?.

 

15  See § 144.1 [ Prepetition Foreclosure Judgment: Curing Default, Payment in Full or Modification under § 1322(c)(2)? ] § 85.3  Prepetition Foreclosure Judgment: Curing Default, Payment in Full or Modification under § 1322(c)(2)?.

 

16  11 U.S.C. § 1322(c)(2).

 

17  See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

18  See § 104.1 [ The Power to Modify ] § 74.11  The Power to Modify.

 

19  199 B.R. 643 (Bankr. E.D. Tenn. 1996).

 

20  See American Gen. Fin., Inc. v. Paschen (In re Paschen), 296 F.3d 1203, 1207–08 (11th Cir.), cert. denied, 537 U.S. 1097, 123 S. Ct. 696, 154 L. Ed. 2d 648 (2002) (Undersecured short-term mortgage is not protected from modification and can be bifurcated under § 1322(c)(2). “The 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). . . . The phrase ‘payment of the claim as modified pursuant to section 1325(a)(5)’ is an explicit statement of § 1322(c)(2)’s purpose: claims that fall within its ambit are subject to bifurcation into secured and unsecured parts, with the unsecured portion subject to ‘cramdown’ pursuant to § 1325(a)(5).”). Accord First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468 (B.A.P. 6th Cir. 1998) (Section 1322(c)(2) creates a statutory exception to the protection from modification for “short term” home mortgages in Chapter 13 cases; debtor can bifurcate undersecured second mortgage and pay allowable secured portion in full with interest consistent with § 1325(a)(5), while paying unsecured portion the 10% provided for all unsecured claims.); Magnolia Mortgage v. Arnett (In re Arnett), 278 B.R. 239, 243 (S.D. Ala. 2002) (Adopting First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468 (B.A.P. 6th Cir. 1998) and rejecting Witt v. United Companies Lending Corp. (In re Witt), 113 F.3d 508 (4th Cir. 1997), Chapter 13 can bifurcate a second mortgage on the debtor’s principal residence that will balloon before the last payment under the plan. “‘Section 1322(c)(2) now creates an “exception to the exception” for the subset of real property secured claims “in a case in which the last payment of 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 now due.”’ . . . In contrast to the analysis of the Fourth Circuit in Witt which restricts the application of § 1322(c)(2) to ‘payments’ under a plan, the Sixth Circuit more logically analyzes the plain language of this statute and concludes that the authorized modification ‘pursuant to § 1325(a)(5)’ can only be interpreted as permitting the modification of the ‘claim’ itself.”); In re Petrella, 230 B.R. 829, 833 (Bankr. N.D. Ohio 1999) (Partially secured second mortgage can be bifurcated and crammed down because holder failed to prove that its mortgage was not within the reach of § 1322(c)(2). “The 1994 enactment by Congress of § 1322(c)(2) did not constitute a legislative overruling of the Supreme Court’s decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993). Rather, Congress changed the class of mortgages that are protected from modification by § 1322(b)(2). . . . Section 1322(c)(2) departs from prior law only by identifying a narrow class of short term mortgages that were protected from modification before 1994.”); In re Sexton, 230 B.R. 346, 350 (Bankr. E.D. Tenn. 1999) (Short-term mortgage that will mature before the last payment under the plan can be modified under § 1322(c)(2) and crammed down; mortgage is wholly unsecured and can be treated as a general unsecured claim. “Following the precedent of [First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468 (B.A.P. 6th Cir. 1998),] and [In re Young, 199 B.R. 643 (Bankr. E.D. Tenn. 1996)], this court reads § 1322(c)(2) to permit the bifurcation of claims as provided by § 506(a). In this case, the value of the Debtor’s residential property is less than the sum of the first and second mortgages against it. American General is the third mortgagee. There being no value in the collateral to secure American General’s claim, the Debtor has properly crammed down American General pursuant to § 1325(a)(5)(B) to the value of the collateral, zero.”); In re Reeves, 221 B.R. 756, 756–60 (Bankr. C.D. Ill. 1998) (Agreeing with First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468 (B.A.P. 6th Cir. 1998), and In re Young, 199 B.R. 643 (Bankr. E.D. Tenn. 1996), and In re Mattson, 210 B.R. 157 (Bankr. D. Minn. 1997), and disagreeing with Witt v. United Companies Lending Corp. (In re Witt), 113 F.3d 508 (4th Cir. 1997), debtor can bifurcate and cram down note that ballooned and became payable before the filing of the Chapter 13 petition. Mortgage note for $91,400 ballooned on September 14, 1997. Petition was filed on October 27, 1997. Plan provided $702.79 per month for 60 months to the mortgage holder with a balloon payment five years after confirmation “at which time Debtors would find alternative financing to pay off the balance of the mortgage debt. . . . Claimant does not deny that its mortgage falls within the scope of § 1322(c)(2) in that its mortgage came due prior to the filing of the petition in bankruptcy. . . . Claimant also acknowledges that § 1322(c)(2) allows for modification of the Claimant’s rights . . . . Claimant disputes that § 1322(c)(2) permits Debtors to bifurcate its claim. . . . It is remarkable . . . that there is no mention anywhere in the legislative history of § 1322(c)(2) of the Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993) case. Even if Congress had intended the interpretation of § 1322(c)(2) set forth in Witt, one would have expected some reference to the definitive case analyzing § 1322(b)(2), the provision to which § 1322(c) was to provide substantial exceptions. . . . [T]he Court agrees with the court in Young that the legislative history for § 1322(c)(2) is inconclusive. . . . [T]he language of the statute itself, particularly the phrase ‘payment of the claim as modified,’ has a plain meaning which, on its fact, seems to allow for the bifurcation permitted in Young, Mattson and Eubanks. . . . [T]he Court finds . . . that § 1322(c)(2) permits the bifurcation of an undersecured mortgage on a Chapter 13 debtor’s principal residence when the last payment on the original payment schedule is due before the final payment under the plan is due.”); In re Bagne, 219 B.R. 272, 274–78 (Bankr. E.D. Cal. 1998) (Plain reading of § 1322(c)(2) permits debtor to modify five-year home equity loan that will mature before the last payment under the plan; however, applying § 1322(e), debtor must pay market rate of interest on principal portion of short-term mortgage and contract rate with respect to portion of arrearage that constitutes unpaid principal. With respect to five-year home equity loan, plan would “extend the term of the loan beyond the original due date but not beyond the life of the plan. The Debtor will pay off the entire amount of the loan (the arrearage and principal) with payments made through the plan. The Debtor proposes to pay interest on all outstanding amounts at a rate of 10.0% per annum.” Contract terms required 21% interest. “[A] plain reading of § 1322(c)(2) . . . instructs the court to disregard § 1322(b)(2). If the claim meets the criteria . . . the treatment of it must conform to the provisions of § 1325(a)(5), and § 1325(a)(5) requires a ‘market rate’ of interest, not the contract rate. . . . Accordingly, the court holds that § 1322(c)(2) allows a debtor to modify a home equity loan by use of § 1325(a)(5) in a situation where the final payment on the loan would fall due before the end of the debtor’s plan term. . . . [Section] 1325(a)(5) requires a ‘market rate’ of interest on the payment of the claim.”); In re Mattson, 210 B.R. 157, 159–61 (Bankr. D. Minn. 1997) (“The definitive opinion on § 1322(c)(2) has already been written. See In re Young, 199 B.R. 643 (Bankr.E.D.Tenn.1996). . . . In [Witt v. United Companies Lending Corp. (In re Witt), 113 F.3d 508 (4th Cir. 1997),] the Fourth Circuit parses the sentence in a very odd way, by holding that the last clause ‘as modified pursuant to § 1325(a)(5) of this title’ modifies the word ‘payment’ rather than its direct antecedent ‘claim.’ Such a reading is unnatural and violates rules of both common sense and grammar, not to mention the last antecedent rule of statutory construction. . . . The Young court uses a more straightforward . . . analysis of the section. It begins with the words ‘notwithstanding subsection (b)(2).’ We are therefore to ignore subsection (b)(2) . . . . While part of § 1322(b)(2) says that the rights of home mortgagees may not be modified, § 1322(c)(2) says ignore that language. . . . The briefly stated purpose of the provision suggests that it was to overrule First Nat’l Fidelity Corp. v. Perry, 945 F.2d 61 (3d Cir.1991). However, the new § 1322(c)(2) has little, if anything, to do with Perry. . . . [I]f anything, it is § 1322(c)(1) which deals with the situation in Perry . . . . The Fourth Circuit makes much about the fact that the commentary to § 1322(c)(2) does not mention an intent to overrule Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993). . . . [W]hile § 1322(c)(2) provides an additional exception to § 1322(b)(2) as interpreted in Nobelman, the new section does not purport to overrule Nobelman . . . . The reason for the rule against modification of home mortgages seems to be an intent to encourage the flow of capital into the home lending market. . . . Section 1322(c) addresses mortgages that have nothing to do with the home mortgage market.” Second mortgage originally amortized over five years is an unsecured claim.); In re Miller, 191 B.R. 487, 489 (Bankr. S.D. Fla. 1995) (“The plain language of Section 1322(c) clearly and explicitly overrules [Seidel v. Larson (In re Seidel), 752 F.2d 1382 (9th Cir. 1985),] and removes the protection against the modification of certain mortgages, including those that have matured pre-petition. . . . [D]ebtor can modify and pay off a mortgage during the term of the Debtors’ plan which fully matured prepetition.” Plan that pays principal and interest due on second mortgage over five years cannot be confirmed because it does not propose to pay postpetition interest on the prepetition debt.).

 

21  199 B.R. at 647–53.

 

22  113 F.3d 508 (4th Cir. 1997).

 

23  113 F.3d at 511–13.

 

24  See § 102.1 [ Surrender or Sale of Collateral ] § 74.5  Surrender or Sale of Collateral before BAPCPA.

 

25  See § 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations.