Richard J. Shurtz, Attorney at Law

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Chapter 13 plans prohibit large balloon payments at the end

In Washington state and all other jurisdictions, a Chapter 13 bankruptcy is based on making periodic payments to the Chapter 13 trustee over a three to five-year period. The trustee then pays administrative expenses and divides the net funds among the person's creditors. A Chapter 13 bankruptcy is a valuable tool and sometimes a life-saver for those who want to hold onto their home despite being in default and owing substantial arrearages.

The monthly payments are usually the same each month although there is some creativity allowed in setting up the schedule of payments. With respect to secured accounts such as a first mortgage on the person's home, the arrearages are generally paid prior to any funds being distributed to unsecured creditors. Also, unsecured creditors are paid only a small percentage of the amount due, which will be higher if the person has nonexempt assets to protect. At the same time, the borrower must keep up the regular mortgage payments in full each month.

Sometimes, a dispute arises over the proposed payments regarding a first mortgage. Recently, a bankruptcy judge sitting in Florida issued a decision regarding two separate proposed plans where each borrower attempted to make a balloon payment as the final payment to the first-mortgage holder at the end of the five-year period. The creditors objected, and the court decided that under the Bankruptcy Code balloon payments are not authorized.

In Washington state and elsewhere, it is possible for the lender and the borrower to agree on a Chapter 13 payment schedule, including a final balloon payment that would far exceed the monthly payments made previously. However, where the creditor objects to such a proposal, the courts usually do not approve such financing creativity. The person intending to file a Chapter 13 will want to carefully review the plan payments and the proposed plan with a consumer bankruptcy attorney to have a valid plan ready to go prior to even filing the papers.  

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