Question Designing a chapter 13 Plan to deal with a balloon creditor

[neverstop]

An expired-balloon lender is blowing up a chapter 13 plan with huge trustee payments beyond anything that is reasonably do-able. This is not lost on either the trustee or the judge or even the other creditors. It seems none of the standard plans deal with what is blatantly predatory. Attorneys seem too timid to think outside the box. Does anybody have ideas or experience as to how to push these types of people out in the plan?

[neverstop]

Let me add the plan is not yet even filed let alone confirmed, so I'm in the area of designing it to pass feasibility. the colloterol is way above water, which is why the balloon lender wants it.

[despritfreya]

Your post does not make sense. Do you have a balloon payment on a mortgage (your residence perhaps) that has fallen due or will come do shortly? Is it rental property? Please give more details.

Des.

[neverstop]

Hi Des,

Sorry for the confusion. Yes the balloon is a (2nd) Mortgage that had interest only payments for about three years. The lender refused a customary extension when it became apparent that the market for refinance had dried up. The principal is $98,000.00 with a "default" rate of 26% and yes the balloon due date has expired. It is one of the main reasons I filed chapter 13. To pay his balance as a 60 month loan make that payment impossibly high in the plan. I can't believe that I'm the first to have encountered such a situation, thus I'm interested how other people might have addressed it in their proposed plan to gain confirmation. The 1st and 2nd combined do not even reach 50% loan to value. I have significant equity at stake.

Thanks,

[catleg]

A chapter 11 plan is not limited to 5 years.
Not sure if that helps any.
I think the answer is to find a "hard money" lender to refi the balloon.

[despritfreya]

The principal is $98,000.00 with a "default" rate of 26% and yes the balloon due date has expired. It is one of the main reasons I filed chapter 13. To pay his balance as a 60 month loan make that payment impossibly high in the plan. I can't believe that I'm the first to have encountered such a situation

1. Not an unusual situation
2. Assuming the property is your homestead residence, what kind of equity is in it over the allowed exemption - said equity having to be paid to your unsecured creditors?
3. Chapter 11, as indicated in another post, is a viable alternative so long as you have at least 1 impaired creditor voting in favor of the plan but, it can still be done in a 13.
4. Plan can provide payment in several ways:

a. Principal and interest in equal installments over 60 months outside the Plan, paid directly to the lender, thus saving the Trustee fee (interest should not be at the default rate, it should be at the non-default contract rate, maybe even less - at least in the 9th Cir . Don't know about your Circuit.)
b. Since there is such a large equity cushion, re amortize the loan over 60 months, make an interest only payment outside the plan and balloon the principal on or before the 60th month through the sale or refinance of the property.
c. If "b" above is to speculative, then increase the monthly payment beyond a simple interest payment so that there is a reduction in the principal and balloon it in less than 60 months. There are other variations on this but I think you get the idea.

Des.

[neverstop]

Thanks Catleg, the issue is this is a hard money lender, they don't care if I pay the loan. They want the building and are using their onerous position to try to get it.

Thanks Des for the suggestions. By the way, the mortgages in question is not on my residence.

It seemed intuitively feasible for me to propose a Plan that would provide this creditor payments similar to the other creditors, which have amortized 30-yr. loans at market interest rates. Such payments thus could be made with my initially depressed income stream and allow for say a buyout of this creditor when refi conditions improve and my income stream also improves. I think it can be reasonably shown to grow over the life of the Plan. Up until now even attorneys seemed to imply the entire balance is due "in equal payments" over the 5-year span. To do so, made for a monthly installments more than all my other creditor arrears --combined, by several times. This would doom me to dismissal because adequate payments would not be possible. If it matters, I believe we are in the 10th Circuit (mtn. west). If anybody has seen Plans similar to what I'm describing that I could use as a template, please let me know. Or other ideas that might be proposed.

Thanks.

[despritfreya]

In response to:

"By the way, the mortgages in question is not on my residence."

Then I trust you are a 100% plan. If not, you will lose the property anyway:

1. You must pay the non exempt value to your unsecured creditors;
2. The property cannot be running at a loss. Meaning it needs to be income producing and self sufficient. If it is income producing and the lender has an “assignment of rents” clause you now have a cash collateral issue which, if the lender is smart, the lender will object to your use of its money.

Based upon the above, to defeat a Motion for Relief you must show that the property is necessary for an effective reorganization. Unless you are paying 100% of all allowed claims, if this property is costing you $$ to keep at the expense of your creditors, it will need to be liquidated as it is not "necessary for an effective reorganization". Upon liquidation the lender(s) are paid and the net, net proceeds are turned over to the Trustee. If you are a 100% Plan then the only issue you will have is how and when the lender is to be paid (adequately protected), which leads me to. . .

"It seemed intuitively feasible for me to propose a Plan that would provide this creditor payments similar to the other creditors, which have amortized 30-yr. loans at market interest rates. Such payments thus could be made with my initially depressed income stream and allow for say a buyout of this creditor when refi conditions improve and my income stream also improves."

The Code (and supporting Case law, at least in the 9th Cir which has a case right on point) requires that a secured creditor be paid over the life of the Plan. See 11 USC 1325(a)(5)(B)(iii) which requires that the "value. . . of the property to be distributed under the plan on account of such (secured) claim is not less than the allowed amount of such claim. . ." This, unless the creditor agrees otherwise, closes the door to forcing a re amortized loan over say 30 years. However, what you theoretically could do is re cast the loan based upon a 30 year amortization schedule with a balloon in 5. I've tried this several times. Unfortunately in each instance the debtor really could not afford the property and was unable to maintain payments long enough to find out if this type of a Plan would pass muster in the face of an objection by the creditor.

Des.

[neverstop]

Thank you Des for your thoughts and experiences, they are valuable.

I take it when you refer to 100% plan, that is jargon for everybody gets paid, secured and unsecured. That is the case. All my secured creditors are seasoned (20+yrs.) mortgages with N.A. Banks, except for this ill-advised expired balloon second. Virtually the only unsecured creditor I have is the power utility ($9,500.00). My balances are less than most people pay for cars and my highest leveraged property happens to be the one with this second and that is under 45% LTV. The first mortgage is less than 2/3rds. of this second. As to income, I have issues with some addresses that are vacant, but not chronically so. This property funds the entire trustee's payment for all other creditors combined while also paying the first mortgage PITI. But if I add this expired balloon merely divided by 60 months, it increases that figure by four-fold and kills the plan. That is way I have to do something like what you propose or similar. Surely such a situation and its solution can't be all that novel, especially in today's climate. I think it is glaringly obvious to the Judge(?), the trustee, and to the other creditors. If it helps sweeten the plan, the first mortgagee, N.A. Bank, when I asked their attorney broached the the idea of buying out this creditor with a new first, ridding the plan of them entirely. Thus I could propose searching for buying out the balloon-of the balloon from the get go instead of just a balloon five years out and that's it. One of the objections I can imagine being raised would be the state of the economy at some future time. "Let us get our's now your honor, before our nation goes off the cliff".