Plan May Provide for Balloon Payment

Posted by NCBRC - October 26, 2016

A plan providing for periodic payments on a mortgage ending with a balloon payment during the plan, does not violate the Code’s requirement that plan payments be in “equal monthly amounts.” In re Cochran, No. 15-52314 (Bankr. M.D. Ga. Sept. 1, 2016).

William Jackson Cochran had a loan from the Bank of Perry which was secured by his residence and surrounding land. The terms of the lending agreement were that Mr. Cochran would make regular monthly payments for three years then pay off the remainder of the loan in a balloon payment. When the balloon payment came due, Mr. Cochran was unable to make it but continued to make the regular monthly payments. The Bank assigned the loan to RREF and RREF instituted a foreclosure action. Mr. Cochran filed a chapter 13 bankruptcy petition to save his home. His proposed plan contemplated continuing the payments he had been making as Adequate Protection Payments. The plan proposed to pay the remainder of the debt in a single payment within twelve months of confirmation.

RREF opposed the plan arguing that, 1) regular payments ending with a balloon payment violates section 1325(a)(5)(B)(iii)(I) which provides that “if property to be distributed pursuant to this subsection is in the form of periodic payments, such payments shall be in equal monthly amounts,” and 2) the plan was not feasible.

The bankruptcy court began by acknowledging that the majority of courts have found that a plan provision for monthly payments followed by a balloon payment is prohibited by the Code. It explained that those courts generally base this conclusion on: 1) statutory language, 2) congressional intent, and 3) precedent. Finding that the Eleventh Circuit had not spoken on the issue, the bankruptcy court found that it was not controlled by precedent and it broke with the majority.

With respect to the plain language argument, the court disagreed with those courts finding that once periodic payments are established a balloon payment deviates from those payments and is therefore prohibited. Rather, the court found that a balloon payment is a separate, one-time, distribution of property rather than a continuation of periodic monthly payments. “A balloon payment satisfies the debt in full, and thus by definition cannot be repeated periodically, whether in equal amounts or otherwise.” The provisional word “if” in section 1325(a)(5)(b)(iii) indicates that Congress contemplated both periodic payments which are subject to the equal amount requirement, and non-periodic payments which are not. The court also disagreed with the assumption, apparently made by other courts, that each debt had to be dealt with in the plan in only one way. The absence of the definite article “the” between “if” and “property” permits the conclusion that property distributed on account of a claim may be distributed by different methods. Some property may be distributed in equal monthly installments, and some may be distributed in a lump sum.

The court next found that other courts improperly speculated as to congressional intent despite the fact that there is no actual legislative history to support the conclusion that Congress intended to prohibit balloon payment provisions in chapter 13 plans. Rather, the court found it is just as likely that Congress intended the equal monthly payment requirement to give creditors an assurance of regularity when payments are ongoing, rather than prohibit a final balloon payment. The fact that pre-BAPCPA practice permitted balloon payments further supports the conclusion that Congress did not, by implication, change that practice when it added the equal monthly payment provision to section 1325. In fact, permitting balloon payments within the parameters of a chapter 13 plan furthers the congressional goal of providing debtors flexible means with which to repay debts.

The court, citing In re Ramirez, No. 13-20891-AJC, 2014 WL 1466212, at *4 (Bankr. S.D. Fla. Apr. 7, 2014); In re Meredith, No. 11-30227, (Bankr. D. Or. 2011); In re Davis, No. 10-39945 (Bankr. D. Or. May 5, 2011), noted that while it may be in the minority, it is not alone in finding that balloon payments harmonize with the Code and with congressional intent.

As to the issue of feasibility, the court was persuaded that there was good chance of success of the plan and that, in any case, there was little risk to the creditor should the plan fail. The residence was over-secured and the debtor agreed to a provision in the plan lifting the automatic stay should he fail to make the required payments.


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