Mortgage May Be Bifurcated Under Section 1322(c)

Posted by NCBRC - April 1, 2022

The Bankruptcy Court for the Eastern District of Wisconsin joined the majority of courts in finding that section 1322(c)(2) “authorizes modification of a principal residence loan through bifurcation, when the last payment on the original payment schedule is due before the final plan payment is due.” In re Harris, No. 21-26280 (Bankr. E.D. Wisc. March 16, 2022).

The debtor filed her chapter 13 petition shortly after the final balloon payment was due on her home mortgage. At the time of her petition, she owed $78,009.00 on the mortgage and she valued the residence at $45,000.00. In her plan, she proposed to bifurcate the claim and pay the entire secured portion and none of the unsecured portion. The mortgage creditor objected to confirmation on three grounds only one of which was addressed in this order. That issue was whether section 1322(b)(2) precluded the debtor from modifying the treatment of the mortgage beyond altering the terms of the repayment schedule.

The case rested on interpretation of section 1322(c)(2) which provides:

(c) Notwithstanding subsection (b)(2) and applicable
nonbankruptcy law—
. . .
(2) in a case in which the last payment on the original
payment schedule for a claim secured only by a
security interest in real property that is the debtor’s
principal residence is due before the date on which the
final payment under the plan is due, the plan may
provide for the payment of the claim as modified
pursuant to section 1325(a)(5) of this title.

The parties disagreed as to whether the phrase “payment of the claim as modified” permits modification of the claim itself, thereby allowing the debtor to bifurcate the claim into secured and unsecured portions under sections 1325(a)(5) and 506(a), or merely permits modification of the “payment of the claim,” thereby limiting the debtor to modification of the payment schedule on the claim.

Interpreting the text of section 1322(c)(2), the court found the grammatical rule of “last antecedent” supported the debtor’s position. Under that rule, the phrase “as modified” would modify the previous term “claim.”

The court found that the holding in Nobelman v. American Savings Bank, 508 U.S. 324 (1993), did not require a different result. In Nobelman, the Court found that the anti-modification provision in section 1322(b)(2) included “the right to repayment of the principal in monthly installments over a fixed term at specified adjustable rates of interest.” The court here found that section 1322(c)(2) “created a carve-out from the types of mortgages that are protected from modification by § 1322(b)(2), the subsection Nobelman interprets.” The court found its interpretation of section 1322(c)(2) did not conflict with Nobelman.

The court also rejected the creditor’s argument that the title of the Bankruptcy Reform Act of 1994 that created section 1322(c)(2)– “Period for Curing Default Relating to Principal Residence”—indicates congressional intent to address only the schedule of repayments rather than the claim itself. The court declined to interpret the statute in a way that contradicted its plain language based on the title, especially where the court found the title did not preclude Congress from including an exception for short-term and balloon mortgages to the anti-modification provision.

The court overruled the creditor’s objection to confirmation based on this issue and scheduled a subsequent hearing on the issues of the proper valuation of the property and the appropriate interest rate.

Harris Bankr ED Wisc March 2022


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