I was recently engaged in a Chapter 13 case after the debtor’s bankruptcy plan had already been confirmed (the case shall go unnamed). After reviewing the plan, I quickly learned that the debtor had secured a good deal for himself to cure the pre-bankruptcy arrearage–monthly arrearage payments of less than $200.00 for the plan’s duration, with one (1) balloon payment of around $20,000 at the end of the plan to repay the remaining arrearage. Note that the issue of pre-petition arrearage balloon payments does not implicate the Chapter 13 anti-modification prohibition for debts secured by the debtor’s primary residence as set forth in 11 U.S.C. § 1322(b)(2) (“the plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence”). A chapter 13 plan may propose to cure the pre-petition arrearage for a claim secured by the debtor’s primary residence but cannot modify or restructure that debt without the creditor’s consent.

In my case, the basis for the balloon payment was that the debtor expected to receive a large cash settlement late in the plan.  Since no parties-in-interest objected to the plan, the plan was confirmed, and I was stuck with it. The plan treatment for my client (a secured creditor with a lien on the debtor’s primary residence) seemed manifestly unfair and seemed to violate basic principles of chapter 13. My client had a substantial pre-petition arrearage and was forced to wait years with only the mere hope of repayment; in the interim, the debtor just has to make minimal payments to stay in chapter 13. Given this seemingly bizarre result, I researched the issue of arrearage balloon payments to make sure that if I encountered an attempted chapter 13 balloon payment in the future, I would be prepared to object. Fortunately, after reviewing the issue, I found that most courts prohibit balloon payments, with a few rare exceptions.  

Specifically, the permissibility of arrearage balloon payments in chapter 13 turns on the requirement that plan payments to a secured creditor “must be in equal monthly amounts.” 11 U.S.C. § 1325(a)(5)(B)(iii)(I). Most courts have held that this statutory language bars a final balloon payment, which by its very nature is in a different amount than the prior regular monthly payments.  See, e.g., In re Benedicto, 587 B.R. 573, 578 (Bankr. S.D. Fla. 2018) (holding balloon payments are non-conforming periodic payments barred by the plain language of § 1325(a)(5)(B)(iii)(I)); In re Materne, 640 B.R. 781, 804 (Bankr. D. Mass. 2022) (The majority holds this subsection prohibits balloon payments....These cases argue a balloon payment is part of the stream of periodic payments. It follows that the monthly payments and eventual balloon payment are periodic payments not in ‘equal monthly amounts’).    

It is worth noting that some courts have permitted arrearage balloon payments under specific circumstances that will not be present in the vast majority of chapter 13 cases.  See, e.g., In re Olsen, 604 B.R. 790, 801 (Bankr. W.D. Wis. 2019)(“While the majority interpretation may be proper in some contexts, the unique facts of this case unequivocally warrant application of the minority view”).  Also, at least one Court, the Middle District of Georgia, has adopted the minority rule. In re Cochran, 555 B.R. 892, 900 (Bankr. M.D. Ga. 2016)(reasoning that “balloon payments are not within the ambit of the ‘periodic payments’ under the plain language of § 1325(a)(5)(B)(iii)(I), and, as such, need not be equal to preceding payments”). However, the reasoning in Cochran has since been rejected by other jurisdictions. See, e.g., Benedicto, 587 B.R. at 576 (to “find that the final payment is not recurring, and therefore is not periodic, is a stretch”); In re Shumbera, 2020 WL 7183540, at *2 (Bankr. M.D. Fla. Dec. 3, 2020) (“A balloon payment is simply the last payment in a series of periodic payments. That it is the last in a series of payments and in a different amount does not exclude a balloon payment from the definition of a periodic payment”).

The key takeaway is that while Chapter 13 arrearage balloon payments are generally prohibited, the secured creditor’s attorney must be vigilant and object to this plan treatment. Otherwise, a creditor’s attorney may be stuck in the scenario I am in now – having a client be forced to potentially wait years with only a mere hope of being repaid.