12 Nov When are Balloon Plans Permissable under BAPCPA?
Section 1325(a)(5) of the Bankruptcy Code, added as part of the 2005 BAPCPA amendments, imposed a new requirement on Chapter 13 plans. The section states, in part:
“The court shall confirm a plan if […] with respect to each allowed secured claim provided for by the plan […] property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts.”
The most obvious interpretation of this language is that balloon plans are no longer permissible in Chapter 13 bankruptcies (absent assent of the lender). But by this I mean balloon plans which start off with little payments and end with a big payment. The language leaves open the possibility of a single-payment plan. Such a plan–which might involve the sale of a home–doesn’t propose periodic payments and so stays clear of the statute’s prohibition. However, the problem with this approach is adequate protection. If in order to make a plan confirmable, a debtor must not make any payments to the secured creditor (a perverse result), then how can a debtor adequately protect the creditor? One answer is to have an equity cushion in the collateral. which would protect the lender even without payments for a time. Absent this, however, it is hard to see a court maintaining the automatic stay for any significant period of time to allow a debtor to try to sell collateral, such as a home, with a balloon plan. This makes sense because usually the only people with the motivation to sell a home through a bankruptcy are those with home equity who don’t want to undergo foreclosure.
Nicholas Ortiz, Boston Bankruptcy Attorney
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