Argument For Allowing Debtors To Pay Secured Value Of Homestead Through Chapter 13 Bankruptcy
For Debtors who file Chapter 13 Bankruptcy, the Bankruptcy Code permits them to Cramdown or pay only the Secured Value of Fair Market Value of an Investment Property or Non Homestead Property through the Chapter 13 Bankruptcy Plan. However, Bankruptcy Code Section 1322(b)(1) states the “plan may modify the right of holders of secured claims, other than a claim secured only by a security
interest in real property that is the debtor’s principal residence…”. That means that a Debtor filing Chapter 13 cannot modify the claim or Mortgage on his Principal Residence may do so for any other type of secured claim.
Supposedly, Congressional reasoning behind this Bankruptcy Section was that Lenders who furnish loans to consumers for the purchase of a Principal Residence are providing an essential service for which such Lenders are to be given special protections.
However, anyone familiar with the destructive economic forces bestowed upon the United States and in States such as Florida, in particular, probably have a different view of the service provided by many of the Home Lenders. Predatory loans, unfair lending practices, and other devices employed by such Lenders, combined with other economic forces, sent the United States economy into one of its darkest economic periods. The Borrowers did have a hand in this economic imbroglio. However, the chief villains, in my opinion, were the Lenders, and a Federal Reserve that thought it wise to continually pump up the housing market, to disguise major systemic problems with the US economy.
Rather than grant a trillion dollar bailout to such Lenders, a better solution would have been to allow Borrowers to Cramdown their home mortgages through a Chapter 13 Bankruptcy. Fewer houses would have been lost to Foreclosures, fewer houses would be sitting vacant and in such disrepair that the only remedy is to bulldoze them. The availability of the Cramdown on Home Loans would also provide a guard against further irresponsible lending.
Section 1322(b)(1) states a Debtor may not modify a claim secured ONLY by a security interest in real property that is the Debtor’s primary residence. However, in many cases, such loans are not secured ONLY by a security in the Borrowers personal residence, but the Borrower is also required to pledge
personal monies or personal property in terms of cash, to provide escrow funds, for taxes and insurance. In such cases, the claim is secured both by the personal residence and these cash funds. In such cases, according to the plain language of Section 1322, the Debtor should have the opportunity to Cramdown
the Home Loan.
Also, most Home Mortgages also require that the Borrower sign a personal guarantee that if the personal residence is Foreclosed upon, the Lender may pursue the Borrower for a Deficiency on the difference between the balance of the Loan and the proceeds received from the eventual sale of the residence. In such cases, an argument can be made that the home loan is secured by not only the real property in question, but by that Borrower’s personal guarantee, which can ultimately translate to additional cash, through garnishment of the Borrower’s wages or assets.