Rhode Island Court Endorses Hybrid Plans

Judge Votolato, Rhode Island Bankruptcy Judge, reaffirmed the viability of so-called “hybrid” Chapter 13 plans in the case of in re Veliz (opens pdf). A hybrid plan is one in which a debtor crams down a first mortgage on an “under water” property, pays any arrears, and maintains regular payments in accordance with the mortgage note. (Note: this cannot be done for single-family primary residences). The benefit for the debtor is that the secured claim in reduced to the value of the property. This will result in the mortgage being satisfied earlier than it would have been before the bankruptcy, as the unsecured portion of the claim will be discharged upon completion of the plan. Judge Votolato’s order is actually one denying confirmation because the debtor sought to deduct the arrearage amount from the secured claim. The judge held that this was impermissible. This case is an important reaffirmation of McGregor and other cases from the 1990s that held (or stated in dicta) that hybrid plans were allowable.