Balloon notes can present some serious issues in a Chapter 13 bankruptcy. As a Georgia bankruptcy attorney, I’ve seen some situations work out and other cases end up serious trouble because of balloon notes.
A balloon note is a type of mortgage which does not fully amortize over the life the loan. Thus, there is a balance at the end of the balloon note. A debtor with a balloon note must either refinance it or pay the entire balance.
Balloon notes are typically give to debtors who can’t qualify for a traditional long term mortgage. I recently met with a couple in my Rome office who built the house of their dreams using a balloon note. At the time the house was constructed, the husband had just started a new job. He expected his income to increase to the point where he would be able to refinance the loan within a few years. Unfortunately, the bottom fell out of the economy and he was unable to obtain a traditional refinance of the loan. To make matters worse, the wife was fired from her job. By the time she found a new job, they were three months behind on their mortgage payments.
The good news is that we can pay back mortgage arrears in a Chapter 13 bankruptcy. The problem is when the balloon note becomes due during the case. In most Chapter 13 bankruptcy cases, the debtor cannot afford to pay the entire balance of a balloon note during the life of the plan. Sixty months is the absolute longest amount of time that a Chapter 13 can run. In most balloon note situations, we will put a provision that will state, “Debtor shall seek court approval of a refinancing of the balloon note when it becomes due.” However, if a bank refuses to redo a balloon note, they can exercise their right to foreclose on the property.
Fortunately, under the current economic climate, most banks don’t want to own more real estate. Thus, they have been willing to allow many debtors to create a new balloon note when the old one becomes due.
Any person who has a balloon note mortgage should bring this to the attention of their bankruptcy attorney before any case is filed.