Ashley Osborn featured in DS News Blackbook – January 2017 edition
Pitfalls for Creditors When the Plan Pays an Escrowed Loan in Full
A chapter 13 plan that treats your creditor client’s claim by paying it in full may appear at first glance to be a treatment that benefits both parties. If the note is already set to amortize within the life of the plan and the debtor is current, then treatment in the section of the plan for payment of claims in full is most appropriate because the treatment already aligns with the amortization schedule in the note. Similarly, if the property is non-residential, modifying the claim by paying it in full over the life of the plan is an option available to the debtor through the Code. However, when the plan treats the claim to be paid in full by the chapter 13 trustee and the loan is also escrowed by the creditor, the result may be an outstanding balance at the end of the case if the proper precautions are not taken.
This situation arises when the plan proposes to either cram the claim down to the value of the property to be paid within the life of the plan or proposes to pay the total claim amount but cramming down the amortization to within the 5 year life of the plan rather than the amortization scheduled in the note. The creditor may not agree to the treatment in the first place after analyzing factors such as the proposed value, interest loss, change to amortization schedule, and whether or not the property is the residence of the debtor. If the creditor does agree to the treatment, the escrow should be addressed at plan confirmation to prevent a mess down the road.