31 Aug No Five-Year Plan Limitation in Chapter 11
Chapter 13 bankruptcy is usually a good fix for someone behind on their mortgage if a loan modification outside of bankruptcy is not possible and foreclosure is looming. However, there are times when a Chapter 13 will not work. I will mention three of these and then say a few additional words about the last.
1. You generally need to be able able to afford your mortgage payment plus an additional amount to pay to the trustee to cure your arrears.
2. You need to be under the Chapter 13 debt limits ($360,475 in unsecured debt and $1,081,400 in secured debt).
3. You must be able to complete your plan in no more than five years.
This last issue is one that I’ve been confronted with recently. When a family can afford their mortgage payment but doesn’t have the additional amount needed to live and pay back mortgage arrears over five years, Chapter 13 won’t work because five years is the maximum limit of a Chapter 13 plan. This limitation does not apply in Chapter 11 cases.
Although individual Chapter 11 cases are more complex and expensive than Chapter 13 cases, sometimes they are the only way to get the job done. You could, for example, propose a plan that would cure your mortgage arrears over seven years in Chapter 13, leaving you sufficient funds to live. Although this is possible, the option does carry with it some costs.
1. Chapter 11 is far more complex and, therefore, expensive than Chapter 13 in terms of legal fees and costs.
2. Proposing a plan calling for payment over, say, seven years could be challenged on feasibility grounds. It’s hard to say what will happen seven years in the future, and this can be a negative factor affecting plan confirmation chances. However, with a stable source of income and realistic projections, plan confirmation is possible.
3. Creditors must vote on a Chapter 11 plan. Even if you are attempting what is known as a cramdown plan, you must have at least one consenting class of claims. If the mortgagee controls your secured class and opposes your plan, this can create difficulties. However, most of the time Chapter 11 prompts creditors to act in their economic interest, including preferring a cure over a foreclosure.
Nicholas Ortiz, Boston Bankruptcy Attorney
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