In the recent case, In re Crawford, arising out of the District of Colorado Bankruptcy Court, the Court was approached with the issue of whether a debtor’s proposed chapter 13 plan that proposes to pay all the debts, including the mortgage on the home subject to arrearages, at the time the debtor is able to sale the home, but where the debtor proposes not to pay any regular payments to her mortgage company throughout her Chapter 13 bankruptcy Plan?
The bankruptcy court held that subject to the debtor including a default provision in case the home fails to be sold during the Plan period, the Debtor’s plan is confirmed.
In In re Crawford, as in a typical foreclosure situation, the debtor filed a bankruptcy to stop the foreclosure sale of her home. In brief, prior to the foreclosure sale, the debtor took series of proactive steps to cure the arrearages including seeking a loan modification as well as hiring a realtor to commence the sale of her home. The debtor’s home was of significant value, valued anywhere from 1 million to 1.5 million. The only debt that the debtor held was the mortgage and its arrearages arising out of facts that are not essential to the case. The proceeds that the debtor could have been realized, depending on the sale amount of the home, ranged anywhere from $400k to $1 million after all the amount had been paid to the creditors, including the mortgage.
In her bankruptcy chp 13 plan, the debtor proposed to sell her home, whose equity would pay and cover all debts due to all her creditors. Specifically, she proposed a 36 month plan consisting of $150 dollars a month that went solely to her unsecured creditor with a provision in her Plan that provided to exclude any payments to her mortgage company until she had sold her house and from whose proceeds she will pay the mortgage debt in full. She also provided that she has hired a “professional real estate agent” to sell her property. Subsequently, the mortgage company objected to the debtor’s proposed Plan.
In reaching its conclusion, the Court analyzed the 6 factors identified under Section 1325(a) and the supporting facts of the debtor’s case. Specifically, the Court held that under 1322(b)(5), it is “permissive” rather than “mandatory” for the debtor to propose a chp 13 plan where debtor pays a regular monthly payment. Rather, the Court looks to section 1322(b)(8) and provides that:
“Where a debtor has ample resources to pay a claim, but those resources are tied up in a real property encumbered by a creditor’s security interest…section 1322(b)(8) allows a court to confirm a plan in which the debtor proposes to pay off that claim within a reasonable amount of time through the sale of the real property.”
The Court disagreed with the creditor’s “debtor is living for free” argument. The Court reasoned that considering the proactive approach by the debtor in trying to sell the house commingled with the amount of equity that is available on the real property, the idea that debtor was prolonging the sell thereby placing an undue risk on the Creditor’s interest in the property was unwarranted. The debtor and the debtor’s real estate agent’s testimony was credible where they testified to their aggressiveness in trying to sell the home. Moreover, the Court acknowledged that the longer the debtor doesn’t sell the property the more her debt to the mortgage creditor will rise, thereby eating away at her equity that she could retain upon the sale of the real property. Further, the Court held that the creditor was provided “adequate protection” by the shear fact that the equity on the home was so substantial. However, although the Court believed that the real property was able to be sold within the proposed 36 month bankruptcy plan based on the evidence and testimony of the marketability of the real property, the Court did concede that a “default provision” covering the possible event of when the sell of the real property did not occur within the life of the debtor’ chp 13 bankruptcy, was permissible.
In conclusion, the Court held that subject to the “default provision”, the debtor’s “sales plan” which withheld the payment of any payments on her mortgage to her home property contingent upon the sale of the same property was permissible under section 1325 and 1322(b)(8).
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