In one of the most important bankruptcy opinions handed down in the past few years, in late May 2013 a panel of bankruptcy judges from the First Circuit Court of Appeals ruled that debtors in a Chapter 13 case could not file what is sometimes called a “hybrid plan.”
Hybrid plans were favorites of debtors trying to restructure mortgages through the Chapter 13 process by using two unrelated sections of the bankruptcy code (hence the nickname).
The First Circuit covers Massachusetts, New Hampshire, Rhode Island, Maine, and Puerto Rico, and the court’s decision is now binding law in all those places.
With a hybrid plan, debtors would try to split an underwater mortgage — usually on rental property — into secured and unsecured portions, and then pay off only the secured portion in full, often over the life span of the mortgage, which can be thirty years or even longer.
But the longest allowable Chapter 13 plan is five years. The First Circuit’s ruling means that any mortgage modified through Chapter 13 would have to be fully paid off within five years. Unless there are only a few years left on the loan anyway, that is obviously beyond the means of most people in bankruptcy.
Car loans, which typically run about five years or a little longer, can still be modified in Chapter 13. The court’s decision affects primarily those who have rental or vacation properties that they are in danger of losing.
While the decision is somewhat disappointing from the consumer’s point of view, it does have the benefit of providing a definitive ruling on the issue in Massachusetts and New Hampshire — something that’s rare in bankruptcy practice, where appellate decisions are few and far between, and many important questions still involve educated guesswork on the part of the bankruptcy lawyer.
By Doug Beaton