In Witt v. United Cos. Lending Corp. (“In re Witt”), 113 F.3d 508 (4th Cir. 1997), the Fourth Circuit held that Chapter 13 debtors are not permitted to bifurcate undersecured home mortgage loans into separate secured and unsecured claims. In re Witt, 113 F.3d at 509. Recently, the Court overruled this twenty-two-year-old decision in an en banc opinion, Hurlburt v. Black, No. 17-2449, 2019 WL 2237966 (4th Cir. 2019). Hurlburt held, over a dissent, that Chapter 13 debtors may now bifurcate home mortgages into separate secured and unsecured claims, and cram down the unsecured portion of such loans in cases where the final payment on the debtor’s home mortgage falls before the last payment under the Chapter 13 plan. Hurlburt, 2019 WL 2237966, at *5.
Plaintiff Larry Hurlburt purchased his home from Juliet Black in 2004 for $136,000. Hurlburt paid Black $5,000 cash at closing, financing the remaining portion of the purchase price through a promissory note executed by Hurlburt in Black’s favor, which was secured by a purchase-money deed of trust naming Black as beneficiary. The note required payment of $131,000 in principal plus 6% per annum, in 119 monthly interest-only installments, with a final balloon payment in May 2014. Hurlburt failed to pay the balance when the loan matured, and Black initiated a foreclosure. Hurlburt filed for bankruptcy pursuant to Chapter 13 in the Eastern District of North Carolina.
Black filed a proof of claim in the bankruptcy proceeding for $131,000. Subsequently, she filed an amended claim for $180,971.72, declining to identify the amount of the claim that was secured or unsecured because she alleged she did not know the collateral’s value.
Hurlburt filed a Chapter 13 Plan that sought to bifurcate Black’s claim into separate secured and unsecured claims. He proposed to pay Black the value of the property less a county tax lien, which he stated was $41,132.19. Under this proposal, the rest of Black’s claim would be treated as an unsecured claim and she would receive no payment for that portion of the claim. Black objected.
The Bankruptcy Court held that the proposed plan modified Black’s rights and violated 11 U.S.C. § 1322 under Witt. Hurlburt v. Black (In re Hurlburt), 572 B.R. 160, 169 (Bankr. E.D.N.C. 2017). The District Court affirmed, Hurlburt v. Black (In re Hurlburt), No. 7:17-cv-169-FL (E.D.N.C. Dec. 19, 2017), as did a panel of the Fourth Circuit. See Hurlburt v. Black (In re Hurlburt), 733 Fed. App’x 721 (4th Cir. 2018) (unpublished) (per curiam). However, the Fourth Circuit panel’s opinion was vacated on January 8, 2019 when the Fourth Circuit granted Hurlburt’s request for rehearing en banc. Hurlburt v. Black (In re Hurlburt), 747 Fed. App’x 168 (4th Cir. 2019) (mem.).
The Fourth Circuit then determined that Witt is no longer good law, as a plain reading of Section 1322(c)(2) of the Bankruptcy Code creates an exception to the general prohibition on modifying loans secured by a principal residence by allowing modification and bifurcation if the last payment on the loan is due before the date on which the final payment under the Chapter 13 plan is due. Hurlburt, 2019 WL 2237966, at *5. This decision could have significant repercussions for both Chapter 13 debtors and lenders. As the dissenting judges noted, the change could lead to “mischief in bankruptcy courts” because debtors “will have obvious incentives to delay filing for bankruptcy or stall proceedings until their final mortgage payment is less than sixty months away” so that the debtor’s final home mortgage payment falls before the last payment under the Chapter 13 plan. That is, after all, the key to avoid paying the full amount owed on the mortgage under the” holding in Hurlburt. As a result, lenders will likely consider this potential for “mischief” in their loan underwriting and approval process.