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Bankruptcy Filer May Not Split Home Equity Into Secured and Unsecured Claims - Bullard v. Hyde Park Savings Bank

June 28, 2013

At Howard Law, P.C., our Rubidoux foreclosure defense attorneys frequently write on this blog about bankruptcy filers who are "underwater " on their mortgages. This is a common situation after the housing downturn, and many people who've filed for bankruptcy since then have had real estate troubles. In Bullard v. Hyde Park Savings Bank, Louis Bullard filed for Chapter 13 bankruptcy with an underwater mortgage, then sought to split the mortgage holder's claim into a claim secured by the home's value, and an unsecured claim for the amount he owed above the value. The Massachusetts bankruptcy court denied confirmation of this plan, finding it inconsistent with the Bankruptcy Code, and the Bankruptcy Appellate Panel of the First U.S. Circuit Court of Appeals affirmed.

Bullard's Massachusetts home is a duplex and thus not exclusively a residence. He was current on his mortgage when he filed for Chapter 13 bankruptcy, but the mortgage was underwater; that is, it was higher than the market value of the property. The bank doesn't dispute this. However, Bullard proposed in his bankruptcy plan to split the bank's claim into a secured claim that he would continue payments on during and after the years of bankruptcy, and an unsecured claim for which he would pay a settlement far less than its total worth. The bankruptcy court ruled that as a matter of law, this plan was not confirmable. The Massachusetts courts, and indeed the courts in other jurisdictions, have not decided the issue.

On appeal, the Bankruptcy Appellate Panel of the First Circuit upheld the ruling, though with different reasoning. The Bankruptcy Code permits debtors to modify creditors' rights. But under a separate provision on "cramdowns," the court found, Bullard's plan can only be confirmed if the bank accepts it, Bullard surrenders the property in foreclosure, or Bullard pays the current dollar value of the home during the five-year life of the plan. Bullard's plan proposed to continue the payments after the plan ended. (His original mortgage was mature in 2035.) Bullard argued that he was subject to an exception allowing "maintenance of payments" as planned by the original mortgage, but the panel cited a third part of the bankruptcy code that requires the bank to retain its lien until the earlier of discharge or payment of the original debt. Because the plan modifies the debt, Bullard may not extend his payments past discharge, the panel said. If a debtor wishes to bifurcate a claim in this manner, the panel said, he or she must win the creditor's approval or pay it in full during bankruptcy.

This is bad news for debtors in the First Circuit who are attempting to strip liens, and that's why Vincent Howard and our Yorba Linda foreclosure defense lawyers suspect it may be appealed to the First Circuit. Lien stripping--the practice of turning underwater mortgages into unsecured claims--is not uncommon right now, but it often takes place with second or third mortgages that are valueless because the first, most senior, mortgage is already underwater. That first mortgage is not being modified, as Bullard was attempting to do, and thus the requirement to pay by the end of the bankruptcy plan is not invoked. But a lot is at stake for people who got into trouble with their loans during the housing bubble--and their banks. Vincent Howard and our Redlands foreclosure defense attorneys would support an appeal seeking to legitimize these "hybrid" plans.

Led by partner Vincent Howard, Howard Law represents Californians seeking to protect their homes through a well-planned bankruptcy or predatory lending litigation. To learn more, call us toll-free at 1-800-872-5925 or send us an email.

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