Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.
By Diane Davis
Sept. 12 — Balloon payments to a creditor holding a claim secured by the debtor's residence are allowed in a debtor's Chapter 13 plan, a bankruptcy court in Georgia held Sept. 1 ( In re Cochran, 2016 BL 288910, Bankr. M.D. Ga., No. 15-52314-AEC, 9/1/16 ).
Judge Austin E. Carter of the U.S. Bankruptcy Court for the Middle District of Georgia declined to follow the majority rule that balloon payments in Chapter 13 plans are “periodic payments” prohibited under Bankruptcy Code Section 1325(a)(5)(B)(iii)(l).
According to the court, the plain language of the statute allows for balloon payments.
In Chapter 13 bankruptcy, individuals receiving regular income may obtain debt relief while retaining their property, but to do so, the debtor must propose a plan that uses future income to repay all or a portion of his or her debts over a three to five year period.
Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, it was common for some Chapter 13 plans to provide for backloaded payments such as balloon payments, the court said. In response to creditor concerns, Congress enacted the equal payment provision and a provision extending the concept of adequate protection to post-confirmation plan payments, the court said. The equal payment provision prevents debtors from backloading payments to secured creditors by paying them other than on a monthly basis, the court said.
Congress had reasons other than prohibiting balloon payments in enacting the equal payment provision, the court said. There is no reason to think Congress intended to depart from pre-BAPCPA practice allowing balloon payments, the court said.
Debtor William Cochran proposed a Chapter 13 plan that within the first 12 months after confirmation, he would make a balloon payment that would pay off the balance of secured creditor RREF II PB-GA, LLC (RREF). Until that balloon payment, the debtor would make monthly payments of $2,500. According to the court, RREF is oversecured.
RREF objected to the confirmation of the debtor's Chapter 13 on the grounds that the balloon payment is a prohibited periodic payment unequal to the preceding adequate protection payments in contravention of Section 1325a)(5)(B)(iii)(l), and the balloon payment renders the plan not feasible. The Chapter 13 trustee didn't oppose confirmation of the plan.
The debtor testified that he planned to transfer his interest in the property to his wife, who would retain a loan in her name to refinance the property. To qualify for the loan, the debtor's auto collision repair business, Cochran Coachworks, Inc., would increase her salary.
The court found the debtor's plan feasible and overruled RREF's objection to confirmation.
Calvin L. Jackson, Warner Robins, Ga., represented debtor William Jackson Cochran; Stephen P. Drobny, Jones Walker LLP, Atlanta, Ga., represented creditor RREF II PB-GA, LLC; Laura Wilson, Office of the Chapter 13 Trustee, Macon, Ga., trustee.
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