A little bankruptcy and mathematics

Picture this scenario: You are thinking about bankruptcy because you haven’t paid your mortgage in many months and are now $36,000 in arrears, and the bank has begun the first steps to foreclosure. You think your house is worth about $230,000, and the payoff balance for the entire mortgage is $240,000. A little “under water,” but not too bad.

So you file a Chapter 13 case, and file a plan with it to make $1100 payments over 36 months to catch up on the mortgage arrearage. ($1000 of each payment goes to pay the bank’s arrearage, and $100 is the trustee’s commission). No one objects to your plan, and the judge confirms it. You begin making the payments to the trustee faithfully.

Right before the claims deadline the bank submits a claims form which states that their mortgage is a secured loan with a payoff balance of $250,000, and is the loan is $40,000 in arrears. No one (including you) objects to this claim either.

The figures are obviously different, so what gives? Well, under a typical bankruptcy analysis, your confirmed plan stays confirmed, and your plan payments stay at $1,100. If the trustee were to object to the plan at this late date (on the grounds that it doesn’t propose to pay off the arrears in full), she will be told tough luck; a confirmed plan stays confirmed without timely objections.

On the other hand, when you complete your 36 month plan, you will still owe the bank money; if there was any dispute over whether the total debt was $240K or $250K, that too, should have been brought before the court. Since you didn’t object to the amount of the claim, $250K is the balance you have to pay.

Massachusetts bankruptcy judge Melvin Hoffman just made this clear in the Ryan case, which you can read here, although the actual case doesn’t have the nice round numbers I have provided.

Just to be clear, what should have happened here is two separate hearings should have been conducted in the bankruptcy court; one on any objection to the confirmation of the plan, and a second on any dispute over the amount of what became an allowed secured claim. Since no one put their objections in on time, the result of the case was essentially “frozen” by the papers that were originally filed in the case.


By Doug Beaton

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