In a victory for Chapter 13 debtors, the United States Court of Appeals for the Fourth Circuit recently issued a major decision that changes the way bankruptcy courts in North Carolina will deal with certain home mortgages in Chapter 13.

For over 22 years, bankruptcy courts in North Carolina prohibited Chapter 13 debtors from modifying the amount of a claim secured by a principal residence. But in Hurlburt v. Black, the Fourth Circuit reversed itself and held that the Bankruptcy Code allows a debtor to modify some home mortgage claims. Now, debtors with underwater, “short-term” mortgages will only be required to pay the value of their home and can discharge the balance as an unsecured claim.

In 2004, Larry Hurlbert bought his home from Juliet Black for $136,000. He paid $5,000 at closing and financed the balance with Black, signing a promissory note and deed of trust. The note had a 10-year term, requiring payment of $131,000 in principal plus 6% interest in 119 monthly, interest-only installments of $785.41, and a final balloon payment in May 2014. When the loan matured, Hulbert did not pay the balance, Black started foreclosure, and Hulbert filed for bankruptcy protection under Chapter 13.

[LEXOLOGY]