Another interesting HELOC angle besides cram down

[catleg]

I have an interest-only heloc which requires a balloon payment on 8/1/2016 which will be 10 years from inception. I realized today that if I can somehow hold off filing chapter 13 until 8/1/2011, then I can include 1/60 of the balloon payment as a payment on secured debt in my means test on the 22C. This all but assures that my unsecured creditors will get nothing. (ends up being equity for me)

That's a long 2 and a half years.

Probably won't work out for me, but hope this idea helps someone else!

[HHM]

Interesting angle...though I am not sure a trustee/court would allow it?

It's one thing to amortize expenses like car repairs, etc, but to amortize a debt that, for purposes of a chapter 13 is contingent (no guarantee you will actually be in the house the entire 60 months), and, it is not a "real" monthly expense. Also, you are not necessarily "entitled" to claim all or the full amount of a secured debt; there are upper limits on what the court will allow. In my area, the court only allows up to about $2,600-$3000 mortgage payment, above that amount the court will not allow you claim more than that (thus, you either find a way in your budget to accomodate that overage, or you move to a cheaper place).

Have you seen a case where this was actually done or are you just speculating?

[catleg]

No, just speculation at this point. I believe I got the idea from a US Trustees document of what is allowed on Form 22c.

I mean, technically speaking, how could they NOT allow it? You could argue totality of circumstances but you'd be complying with the law as written here. There is no exception for balloon payments right (I haven't actually looked, never having seen anything to the contrary).

I'm surprised what you said about what the court allows for a mortgage payment. Since the total debt limits are written into the statute you wouldn't think the court would have anything to say about it. In other words if they'd meant to limit the monthly mortgage payment they could have written it into the statute. Shows you what I know.

It's an interesting topic, because if you have a big enough house and mortgage it sort of means that you could put yourself into chapter 13 at any time to stiff your unsecureds, so the limits you mention are how the courts deal with that I imagine. But I think the "out" there is the requirement that creditors get at least as much as they would in a liquidation. The difference with the balloon payment is that for purposes of calculating the liquidation they'd get zero now, but in 60 months they'd have something, but that is not what the law compares ( the value of the estate at the end of the 13 vs at the beginning).

[HHM]

The limits and whatnot are related to "reasonableness". There is still a reasonableness criteria for expenses. Is it reasonable for someone who is going to get the benefit of a chapter 13 discharge to have a $4,000 mortgage payment...that is a tough argument to make? It's not unheard of, but judges will apply reasonableness (or totatlity of circumstances) to put caps on how much of secured debt payment you can make.

The "problem" with the balloon HELOC is that you are asking the court to amortize the balloon payment within your budget (something that you weren't presumably doing before...now, if you were making an over payment on your HELOC to cover that balloon payment all along, you have a slightly stronger argument). In either case, you would be in for a fight if you tried this, and unless you have a really sympathetic judge, my hunch is you would lose. For chapter 13's, its all about disposible income.

[catleg]

Thanks HHM for your insight. I am learning but what I'm missing is the actual day to day experience in how these things actually play out with real people.
I work with computer software so I am used to trying to find the flaws in logic that make programs break, it is similar to the law in that sense, trying to find the gaps in the logic that you can take advantage of, or if the shoe were on the other foot, trying to seal them off.