Chapter 13 Debtors and Underwater Mortgages

: Chris Lee Law Firm

  Filed under: Mortgage


The United States Court of Appeals for the Fourth Circuit recently gave a highly significant ruling in the case of Hurlburt v. Black, which affects how bankruptcy courts handle certain mortgages in North Carolina when Chapter 13 filings are made.

When making a Chapter 13 filing, the debtors file a repayment plan with the bankruptcy court that makes it mandatory for the debtors to pay back a portion of their debt. The amount of repayment would depend on the amount of money the debtors own, the debtors’ amount of debt, and the total value of the properties owned by the debtors.

Type of Debt

The total amount to be repaid by the debtors is then classified into secured and unsecured claims. The creditors’ secured claims typically have collateral attached, and the unsecured debts do not have any collateral. The debtors then try to frequently bifurcate the lender’s claimed amounts into secured and unsecured claims. Then they proceed to merge the unsecured claims of various creditors and repay only a small amount of the unsecured creditors.

The Bankruptcy Code regulates this practice and has put a limit on debtors’ power to make modifications to the creditor’s claim when the security for the claim is the debtor’s primary residence. The claim is usually barred from any modification by the debtors except for a few instances. This essentially prohibits the debtors from cramming down the loan by dividing it into secured and unsecured parts based on the primary residence’s value and then ending up paying only a small amount of the unsecured debt. The Fourth Circuit upheld this regulation for a very long period. But in the case of Hurlburt v. Black, the court changed its previous stance.

Paying Less

This can be considered a huge victory for debtors. Now, if debtors filing for bankruptcy can make an arrangement wherein their final mortgage payment is due in the 59th month of the 60th month of a bankruptcy plan, then they can keep their house by paying a smaller amount of money than they owe.

If you are in danger of losing your home due to getting behind in your mortgage payments, contact a Dallas bankruptcy attorney to determine how to keep your assets and reorganize or eliminate your debt.

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