Chapter 13: Balloon Payments

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One of the principal benefits of chapter 13 is to permit residential property owners to cure defaults on their property and retain ownership. Although certain rules apply when the property is the debtor’s principal residence versus an income producing property, chapter 13 allows a real property owner to cure delinquencies over a period of up to 5 years by making periodic payments in ”equal monthly amounts.” A recent decision by two bankruptcy judges in the Southern District of Florida held that chapter 13 debtors cannot make balloon payments in their plans. See In re Dora Benedicto, 15-28671-RAM.

A debtor who files a chapter 13 plan must propose a plan and commence making payments within (30) days of the filing of the case. If, for example, the debtor has a $1,000 mortgage payment per month and is in default by $20,000.00, the debtor must propose a plan that makes the contractual payment of ($1,000.00) plus cure the arrearage ($20,000) over a period of up to 5 years with the debtor’s “disposable income”, which is the debtor’s income minus ordinary living expenses.

In this example, the debtor would have to make payments of at least $333.33 per month (there is a 10% commission on trustee payments) for 60 months while staying current on the contractual payment ($1,000). Some debtor’s may lack this extra $333.33 per month and have tried to pay as much as they can with a balloon payment of the balance on the final, or 60th payment. In the Benedicto case, the Debtor owed approximately $42,409.34 in arrearages and proposed to pay $283.24 in months 1-41, $100 in months 42-59 and a $28,996.48 balloon payment in month 60.

The judges in this case examined the legislative history of the Bankruptcy Code and concluded that § 1325(a)(5)(B) of the Bankruptcy Code requires a debtor to make equal monthly payments throughout the plan. It is important to note that the equal monthly payments must commence with the first payment after the plan is confirmed, not after the case is filed. Frequently, a debtor may have to amend his or her plan during the course of the case prior to confirmation. Therefore, the amount of the payments may change so long as they are equal going forward post-confirmation.

While chapter 13 permits a debtor to cure mortgage arrearages and other liens on real (and personal) property, this power is frequently limited by the debtor’s disposable income. Even though this decision closes the door for balloon payments on arrearages, chapter 13 remains a powerful remedy to cure delinquencies on real and personal property secured by liens when the debtor has sufficient disposable income to “cure and maintain.”