You may have been told that first mortgages cannot be crammed down in a Chapter 13 bankruptcy. But is that true for a mobile home? That depends (at least in part) with whether the mobile home is considered personal property or real property in your state.
Section 506(a) allows bifurcation of claims in secured and unsecured portions, with the secured claim being limited to the value of the property, while Section 1322(b)(2) provides that a plan may modify the rights of holder of secured claims “other than a claim secured only by a security interest in real property that is the debtor’s principal residence. . . .” This is often referred to as the “anti-modification” exception, intended to protect the interest of residential home lenders. In other words, you can’t cram down your first mortgage. (You may be able to “strip” a second mortgage if the balance on the first mortgage exceeds the value of your house.)
Is a mobile home the debtor’s principal residence? Although Section 101(13A) provides that the term applies to both the structure and incidental property and includes mobile homes, whether it is the debtor’s principal residence is largely a matter of intent. (Vacation and recreational homes are not covered.)
Is the interest in real property? In the case of a conventional house, the answer is pretty clear. But whether a mobile home is considered real property is generally a matter of state law, and depends on whether there is a mobile home statute and may also require consideration of a number of other factors, such as whether the mobile home can be moved, whether there are permanent structures attached to it, whether there is a well and septic system, etc.
But what if the lender’s claim is secured by additional security in the form of an interest in other property, that is not only by an interest in “real property that is the debtor’s principal residence?
Some courts have held that the 1322(b)(2) exception does not apply if the lender also holds a security interest in escrow funds on the grounds that they are not considered real property under state law, even though escrow funds (and insurance proceeds) are defined by 101 (27B) of the Code as “incidental property” that is part of the debtor’s principal residence. Other courts have found an “exception to the exception” where half of a duplex was rented out as investment property, or where the bank held an interest in “machinery, furniture and equipment (whether fixtures or not)” or in rent proceeds or in credit life insurance proceeds. Other courts have considered typical “boilerplate” language, such as inclusion of household appliances and window shades, to be so nominal as to have no significant effect.
Even if bifurcation is permitted, the question remains as to whether that will mean that the principal is reduced but the term and interest (and therefore the amount of the monthly payment) stay the same, or whether the term stays the same and the principal and interest are reduced, thereby reducing the monthly payment. That depends on the inclination of the judge as well as the position taken by the unsecured creditors.