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Bankruptcy tricky with mortgages

(ran HH edition)

In 1984 Dennis borrowed $34,000 on a VA home loan secured by his residence. His monthly payment was $389.44 for principal and interest. Dennis stopped making his monthly payments in May 1988. In April 1989 the VA-guaranteed lender began foreclosure.

One day before the foreclosure sale in January 1990, Dennis filed Chapter 13 bankruptcy under the "wage earner plan." The lender filed a claim for $44,989.53 which included $11,188.12 in unpaid mortgage payments, late charges and foreclosure costs.

Since the home's market value had declined to $17,000, Dennis filed a repayment plan under the bankruptcy "cram down" law which would give the VA lender a $17,000 secured loan and a $23,927.69 unsecured debt. The lender objected, arguing the bankruptcy "cram down" restructuring law does not apply to home mortgages secured by the bankrupt's personal residence.

If you were the judge, would you rule the lender's VA mortgage should now be secured as to only $17,000 by the home of Dennis with the balance unsecured? The judge said no.

The Chapter 13 bankruptcy "wage earner plan" requires that loan arrearages be cured within five years, while the borrower continues making regular monthly loan payments, the judge explained. To modify home loan terms by using the "cram down" rules that apply to commercial mortgages would not comply with this Chapter 13 rule, he emphasized.

Based on the 1992 U.S. Court of Appeals decision in Sapos vs. Provident Institution of Savings, 967 Fed.2d 918.

Robert J. Bruss is a nationally syndicated columnist on real estate. Write to him in care of At Home, the Times, P.O. Box 1121, St. Petersburg, FL 33731-1121. Questions of general interest will be answered in the column. Because of the volume of mail, personal answers to questions are impossible.