Chapter 13 Bankruptcy Can Modify a Required Balloon Payment
Force a Lender Accelerating your Balloon Payment to Accept Installments Over Time
A balloon payment is a large lump sum payment required upon the termination of monthly installment payments, which may have been “interest-only” payments, in some sorts of longer term loans, such as home equity loans or other “second” mortgages.
A balloon at the end of a term of payments often allows the preliminary monthly installment payments to be charged at a lower per month rate. However, upon acceleration of the balloon payment, the balloon is generally owed in full, which may or may not be an amount of money the homeowner or borrower actually has available to pay.
When the balloon is part of a home equity line or mortgage, secured by a lien on the borrower’s home, a real possibility of foreclosure can result if the homeowner cannot pay the balloon (depending upon the value of the home and other primary mortgage or other liens).
Chapter 13 Bankruptcy and Loan “Modification”
Chapter 13 bankruptcy is a “payment plan” or “reorganization” bankruptcy in which you propose to repay your creditors only what you can afford to pay over a 3-5-year period of time, discharging the unpaid balance of unsecured debt not paid through the Chapter 13 payment plan at the end of the process.
Under Section 1332(b)(c) of the US Bankruptcy Code (the Federal statute governing the bankruptcy process in the US), a loan with respect to a lien on a debtor’s primary residence for which the last payment becomes due within the 3-5-year length of a Chapter 13 plan may be “modified.”
What does that mean?
It means that, if you have a balloon payment on a mortgage (which include home equity lines of credit) loan for your primary residence (not a rental property, etc.) that is coming due shortly, you can file a Chapter 13 bankruptcy and propose to pay the loan, instead of one big lump payment, in monthly pro rata amounts over the life of the Chapter 13 plan (3-5 years, as noted above).
When you file a Chapter 13 bankruptcy, an “automatic stay against collections,” which is a Federal injunction stopping all collections efforts including foreclosures, clicks into place.
Therefore, if you fear foreclosure or other collections efforts on behalf of a balloon payment attached to a lien on your home, a Chapter 13 bankruptcy will stop that foreclosure or collection from happening and require the creditor to sit back, relax, and take monthly installments on the debt instead of insisting on a massive lump sum that you may not have available.
Balloon Payments in Chapter 13 Bankruptcy: The Bottom Line
The bottom line with regard to balloon payments is that such payments are the result of a contract you signed. Therefore, unless the creditor is willing to simply be nice about things, very little in US law will force them to do anything but enforce that contract other than a bankruptcy filing, and only a Chapter 13 bankruptcy can modify the terms of that contractual obligation. A Chapter 7 bankruptcy will not allow such loan modification to occur.
No Chapter 13 bankruptcy should be attempted without the assistance of an experienced bankruptcy attorney.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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