§ 78.4     Curing Default, Waiving Default, Maintaining Payments and Combinations
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 78.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Chapter 13 debtors are not constrained by the Code to use only modification under § 1322(b)(2) to manage allowed secured claims.1 If the debtor does not want to surrender all of the collateral2 and if payment of the allowed secured claim after valuation and modification is not attractive,3 the debtor might consider curing or waiving defaults under § 1322(b)(3). If the secured claim is a long term debt, the debtor can cure defaults and maintain payments under § 1322(b)(5).

[2]

Section 1322(b)(3) permits a Chapter 13 debtor to “provide for the curing or waiving of any default.”4 Not much has been written about the use of § 1322(b)(3) in Chapter 13 cases. Prior to the 1994 amendments, Chapter 13 debtors sometimes resorted to § 1322(b)(3) to manage home mortgages that were protected from modification by § 1322(b)(2) but that could not be provided for under § 1322(b)(5) because the last payment was due before the last payment under the plan.5 With respect to “short term” mortgages, some courts held that § 1322(b)(3) could be used to pay the balance of the mortgage in full during the life of the plan notwithstanding the protection from modification in § 1322(b)(2).6 Some of these courts rationalized that “re-amortizing” a short term mortgage for payment in full during the life of the plan cured the default under § 1322(b)(3) without modifying the claim under § 1322(b)(2). This use of § 1322(b)(3) ceased with the 1994 enactment of § 1322(c)(2).7

[3]

On its face, § 1322(b)(3) could be a powerful tool for managing certain kinds of secured debt through Chapter 13 plans. The section broadly authorizes the curing or waiving of “any” default. Presumably, both monetary and nonmonetary defaults are included.8

[4]

Curing default is a well-worn phrase of art. The same words appear in § 1322(b)(5) with respect to long term secured debts and have been much litigated in that context.9 The typical use of curing default in Chapter 13 cases is to pay the arrearages on a debt through the plan over time. It is interesting that curing default in § 1322(b)(3) contains no modifier such as “reasonable”10 or “prompt.”11 The obvious implication is that a Chapter 13 debtor curing defaults under § 1322(b)(3) could pay arrearages over a longer time than otherwise permitted, for example, if the debtor was using § 1322(b)(5) to cure default “within a reasonable time” and maintain payments on a long term debt.12 One of the few reported decisions to mention the issue states unhelpfully that a “relatively short period of time” is a “reasonable period of time” within which to cure default under § 1322(b)(3).13

[5]

“Waiving” is not defined by the Bankruptcy Code. It must mean something different from “curing.” It might be argued that a Chapter 13 debtor is waiving defaults if the plan declares that missed prepetition payments will be forgiven or that missed installments will be tacked on to the end of the debt. Waiving default might be proposed when the default is difficult or impossible to cure. For example, short of reconveying property, how does the debtor cure a due on sale clause if the debtor wants to keep the property?14 But then what are the limits on waiving defaults? Why cure if you can waive? There is much potential for mischief in the concept of waiving defaults in § 1322(b)(3).

[6]

There is nothing in § 1322(b)(3) to tell us the limits on curing or waiving default with respect to liens on personal property. As discussed elsewhere,15 there has been much attention in the courts and in Congress to defining the point in the death spiral of a home mortgage after which a Chapter 13 debtor cannot undo the lienholder’s exercise of remedies for default under the contract and state law. In 1994, Congress enacted § 1322(c)(1) in an attempt to settle conflicting case law on the limits of curing default with respect to home mortgages.16 There was no similar effort to define the limits on a Chapter 13 debtor’s power to rehabilitate debts secured by property other than a principal residence.

[7]

This is an important issue in Chapter 13 practice. As demonstrated above,17 Chapter 13 debtors are battling lienholders that have repossessed cars and other personal property before the petition to determine whether sufficient property interest remains in the debtor to support management of the claim through a plan. Curing or waiving any default under § 1322(b)(3) is one permitted power of a Chapter 13 debtor with respect to a claim secured by a car repossessed before the petition. After what point in the repossession process does the Chapter 13 debtor lose the power to cure or waive any default?

[8]

If the real estate cases are any indication, the magic point after which curing default is no longer possible for debts secured by personalty should be the sale of the collateral by the repossessing creditor.18 Many reported decisions analyze this issue as a “property of the estate” question, and the decisions are badly fractured with respect to whether a Chapter 13 debtor retains sufficient property interest in personalty repossessed before the petition to use modification under § 1322(b)(2) or the power to cure default under § 1322(b)(3).19 Reasoning by analogy to the real estate cases, much good would come from a rule that limited the powers in § 1322(b)(2) and (b)(3) with respect to personalty by reference to a readily identifiable moment such as sale of the collateral by the creditor. The tortured history of the search for a uniform limit on the power to cure real estate defaults suggests that the courts will continue to search in vain for a uniform limit on the power to cure default with respect to personal property in § 1322(b)(3).

[9]

What does the debtor get if the plan cures or waives defaults under § 1322(b)(3)? The answer seems to be that the debtor gets the original contract terms. The debtor that cures or waives default must then continue making the contract payments and complying with all other contract terms during the Chapter 13 plan.

[10]

An argument can be made from statutory construction that curing default under § 1322(b)(3) does not require the debtor to then comply with contract payment terms. Discussed elsewhere,20 § 1322(b)(5) also permits a Chapter 13 debtor to cure “any default,” but § 1322(b)(5) is conditioned that cure must be “within a reasonable time” and the plan must propose “maintenance of payments while the case is pending.”21 Does the omission of similar conditions from § 1322(b)(3) signal that a plan that cures or waives default under § 1322(b)(3) is not then bound to contract terms? Also stacking or combining the power to modify in § 1322(b)(2) with the curing or waiving of default under § 1322(b)(3) would allow a Chapter 13 debtor to keep or change contract terms.22

[11]

There will be circumstances in which it is in a Chapter 13 debtor’s best interest to cure or waive defaults under § 1322(b)(3) rather than modify the contract under § 1322(b)(2) and pay present value under § 1325(a)(5). For example, the debtor with a car loan at a very favorable promotional interest rate such as “1.9 percent” may be better off to complete the contract than to pay the allowed secured claim with present value interest at a higher rate.23 If the interest rate rule at confirmation in the district would require a higher rate than the contract, and if the value of the collateral and the allowed claim are close in amount, modification under § 1322(b)(2) will not produce an advantage for the debtor. The lack of reported decisions interpreting § 1322(b)(3) probably reflects that the interest rates in most prepetition loans to Chapter 13 debtors are so much higher than the interest rate necessary to ensure present value at confirmation under § 1325(a)(5) that curing default and completing payments under the contract will rarely be advantageous to the debtor.

[12]

Can the debtor go the next step and stack or combine the powers in § 1322(b)(2) and (b)(3)? Discussed elsewhere,24 some courts have held that a Chapter 13 debtor can combine modification of a secured claim under § 1322(b)(2) and curing default and maintaining payments on a long-term debt under § 1322(b)(5) when a real estate mortgage is not protected from modification. A long-term debt that is not protected from modification by § 1322(b)(2) could then be split into its secured and unsecured components, and the plan could pay the allowed secured portion of the claim by curing default and maintaining payments consistent with § 1322(b)(5).

[13]

The same logic might apply to § 1322(b)(3). Assume, for example, a $10,000 note secured by a car worth $6,000. Section 1322(b)(2) permits the debtor to split the claim into a $6,000 secured claim and a $4,000 unsecured claim. Section 1322(b)(3) would then allow the debtor to cure the prepetition default and continue to make contract payments until the $6,000 allowed secured claim was paid in full. Because the contract payments were calculated based on a larger principal balance, use of § 1322(b)(3) in this way would pay the allowed secured claim more quickly than would typically be the case if the debtor paid the present value of the $6,000 allowed secured claim under § 1325(a)(5). The accelerated payment of the allowed secured claim in this manner might save the debtor some interest. The accelerated payment of the allowed secured claim using § 1322(b)(3) might be opposed by the Chapter 13 trustee as it impacts the rights of other creditors through the plan.25

[14]

Modification under § 1322(b)(2) and curing default under § 1322(b)(3) could be helpful to debtors in other ways. For example, several courts have held that when a lienholder repossess collateral before the petition, only the debtor’s right of redemption becomes property of the Chapter 13 estate.26 Typically, redemption of personal property under state law requires lump sum payment of the balance of the contract plus arrearages, attorney fees and collection costs. One of the few reported cases discussing § 1322(b)(3) concludes that modification under § 1322(b)(2) combined with curing default under § 1322(b)(3) permits a Chapter 13 debtor to redeem a repossessed car by curing default and paying the balance of the original contract through the plan. As explained by the bankruptcy court in Tidewater Finance Co. v. Moffett (In re Moffett):27

[T]here is no dispute that a right of redemption . . . is part of the bankruptcy estate. . . . The Bankruptcy Code entitles the debtor to modify the rights of holders of secured claims. § 1322(b)(2) . . . . It also allows the debtor to cure a default. § 1322(b)(3) . . . . The proposed Chapter 13 plan in this case preserves Tidewater’s lien, provides for direct payment of the regular installments coming due, and cures the delinquent installment payments within a reasonable period of time. [This plan] is a permissible method of redemption in chapter 13 and fully protects the secured creditor’s rights.28
[15]

And then there is the question whether a Chapter 13 debtor must pay interest on defaults cured using § 1322(b)(3). As detailed elsewhere,29 the Supreme Court in Rake v. Wade30 interpreted the similar curing default language in § 1322(b)(5) to require that a Chapter 13 debtor pay interest on arrearages cured through a plan. In response to Rake, Congress amended § 1322(e) in 1994 to provide that if a Chapter 13 plan cures a default, “the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.”31 Cases involving home mortgages cured through Chapter 13 plans under § 1322(b)(5) indicate that § 1322(e) will require interest on defaults cured under § 1322(b)(3) only when the underlying contract and applicable state law would require interest.32

[16]

Section 1322(b)(5) permits a Chapter 13 debtor to cure default and maintain payments while the case is pending on any secured (or unsecured) claim “on which the last payment is due after the date on which the final payment under the plan is due.”33 As discussed in much detail elsewhere,34 § 1322(b)(5) is the method of choice for most Chapter 13 debtors to keep their homes. But § 1322(b)(5) is not limited to debts secured by residential real estate. It applies to any long term debt (secured or unsecured35), and rehabilitating an existing long term secured debt is sometimes the only way the debtor can afford to keep the collateral through a Chapter 13 plan.

[17]

On the face of the statute, the powers to cure default in § 1322(b)(3) and (b)(5) overlap and are inconsistent with respect to long term debts. Arguably, § 1322(b)(3) allows a Chapter 13 plan to cure or waive default with respect to any debt, including a long term debt, without satisfying the reasonable time or maintenance of payments requirements in § 1322(b)(5). One bankruptcy court has held that the specific treatment of long term debts in § 1322(b)(5) confines the use of the less specific § 1322(b)(3) to short term debts, eliminating the overlap of the two sections.36 Also, as discussed above, once the debtor cures or waives default under § 1322(b)(3), absent further modification under § 1322(b)(2), what is left is the contract which includes the same payment schedule that would have to be maintained under § 1322(b)(5).

[18]

Though there is no cross-reference in § 1325(a)(5) to § 1322(b)(5), it is reasonable that a secured claim holder can be satisfied at confirmation by compliance with § 1322(b)(5) without also being entitled to satisfaction in one of the three ways provided in § 1325(a)(5). That is, if the debtor cures defaults and maintains contract payments with respect to a long-term allowed secured claim, the debtor need not also pay the present value of the allowed secured claim during the life of the plan. Some courts have harmonized §§ 1325(a)(5) and 1322(b)(5) by finding that long-term treatment under § 1322(b)(5) is a form of present value for purposes of § 1325(a)(5)(B).37 This logic breaks down if the contract rate of interest is less than the rate necessary to provide present value for purposes of § 1325(a)(5)(B)(ii).38 It is probably true that Congress just overlooked the need for a cross-reference to § 1322(b)(5) in the list of ways to satisfy an allowed secured claim holder in § 1325(a)(5). The two sections are accommodated by holding that if the debtor desires to keep property that secures a long-term debt and provides that any arrearage will be cured within a reasonable time and future payments maintained during the plan, the claim holder is not also entitled to payment in full during the plan under § 1325(a)(5)(B) or to surrender under § 1325(a)(5)(C).

[19]

Many kinds of secured debts last by contract longer than the typical Chapter 13 plan. For example, it is not uncommon for car notes to run 60 or even 72 months. If the debtor proposes a 36-month Chapter 13 plan and there are more than 36 months left on the car note, the debtor has the option of curing the default, if any, and simply maintaining payments under the contract during the plan. If the debtor has a favorable 48-month contract at a promotional interest rate that is lower than the current market rate, the debtor may be better off maintaining the contract under § 1322(b)(5) rather than paying the present value of the car under § 1325(a)(5)(B).39 Contracts for the purchase of mobile homes often extend beyond the length of a typical Chapter 13 case and sometimes are more easily managed by curing defaults and maintaining payments under the original contract. A real estate mortgage that is not protected from modification by § 1322(b)(2), even after claim splitting, may be too large an allowed secured claim to be paid in full during the plan under § 1325(a)(5) but can be managed by curing the default and maintaining payments under § 1322(b)(5).40

[20]

Some Chapter 13 plans are so tightly budgeted that the debtor cannot afford to retire a secured claim in full during the plan. If there is a long term contract, even at a higher interest rate than the confirmation rate, the monthly payment required by the original contract may be smaller than the monthly payment that would be required to pay the secured claim in full during the plan. Curing the default and maintaining the contract payment may enhance the feasibility of the plan.

[21]

More often, it will be in the debtor’s best interest to pay the allowed secured claim in full during the plan under § 1325(a)(5)(B) rather than cure the default and maintain payments under § 1322(b)(5). When the contract rate of interest is higher than the present value rate at confirmation under § 1325(a)(5)(B)(ii), if financially able, the debtor should pay the allowed secured claim in full during the plan. This will sometimes be true of second or third mortgages for home improvements—the “aluminum siding loan”—when the claim is not protected from modification and the principal amount of the loan is small enough to be retired during the plan, if the contract interest rate is greater than the present value rate at confirmation, the debtor should modify the claim for payment in full rather than curing default and maintaining payments.41

[22]

Using § 1322(b)(5) to cure defaults and maintain payments on an undersecured long-term debt will rarely be to the debtor’s advantage. Security interests in personal property are often undersecured. Typically, these claims are not protected from modification by § 1322(b)(2) and can be split into secured and unsecured portions under § 506(a).42 At confirmation, the debtor is usually best off to pay the present value of the allowed secured claim in installments through the plan and pay the unsecured portion as a general unsecured claim. The exception will be when the monthly contract payment is less than the payment required to pay the allowed secured claim in full consistent with § 1325(a)(5). Then long term maintenance of payments under § 1322(b)(5) would actually increase the money available for other creditors while the debtor is in Chapter 13. Although maintenance of contract payments on an undersecured claim creates a classification with respect to the unsecured portion of the debt, courts have held the resulting discrimination is fair when the lower contract payment increases the percentage payable to other unsecured claims.43

[23]

One downside to using § 1322(b)(5) to manage a long-term claim is the exception to discharge in § 1328(a)(1).44 At the completion of payments to other creditors under the plan, the debt provided for under § 1322(b)(5) is not discharged and the balance remains the debtor’s personal liability after the Chapter 13 case.

[24]

Curing default under § 1322(b)(5) must be accomplished “within a reasonable time.”45 The reported cases interpreting reasonable time in § 1322(b)(5) are fact bound and fall in a broad range from just a few months to the years remaining on the original mortgage.46 “Maintenance of payments” in § 1322(b)(5) has received some attention in reported decisions when debtors propose to both modify a real estate mortgage that is not protected from modification by § 1322(b)(2) and to then cure default and maintain payments under § 1322(b)(5).47 In that context, the courts generally hold that maintenance of payments means the monthly payment of principal and interest required by the contract.48

[25]

If the plan cures defaults and maintains payments on a long-term secured debt that is not protected from modification by § 1322(b)(2), the mathematics of claim splitting under § 506(a) and maintaining contract payments under § 1322(b)(5) combine awkwardly. For example, suppose the debtor owes $14,000, secured by a $10,000 car. The original contract was for 60 months at 12 percent interest and a monthly payment of $311.42. Assume for simplicity that the contract is in its first month at the filing. If the debtor pays the secured claim in full during the 36-month life of the plan under § 1325(a)(5), after splitting into a $10,000 secured claim and a $4,000 unsecured claim, at 12 percent interest, the secured claim will require $332.14 per month—more than the original contract payment. This will be true for any cramdown interest rate in excess of 7.6 percent. The cost of splitting the claim and paying the secured portion in full through the plan is a higher monthly payment under § 1325(a)(5)(B).

[26]

But what happens if the debtor uses § 1322(b)(3)49 or § 1322(b)(5) and continues paying $311.42 each month for 36 months? Because the claim is not protected from modification by § 1322(b)(2), the debt still splits under § 506(a) into a $10,000 secured claim and a $4,000 unsecured claim. The $4,000 unsecured claim is paid the same as other unsecured claims through the plan—including payment of less than 100 percent and discharge of the balance upon completion of payments under the plan.50 The $311.42 monthly payment would continue during the life of the plan and be applied to the allowed secured claim of $10,000 (with contract interest at 12 percent). At the end of 36 months, a business calculator reports that the plan will have retired $9,107 of the $10,000 secured claim. Under § 1328(a)(1), there will be no discharge of the $893 balance of the allowed secured claim.51 Presumably the debtor would continue to make car payments of $311.42 each month after completion of the plan until the entire $10,000 allowed secured claim was paid (approximately three more months). If the plan was correctly worded, the debtor would then be entitled to release of the lien.52

[27]

What if the value of the car is only $9,000? A monthly payment of $311.42 will fully amortize a $9,000 allowed secured claim at 12 percent interest in approximately 34 months. If the proposed plan is 36 months, there may be a question whether § 1322(b)(5) is available to the debtor. Section 1322(b)(5) permits the plan to provide for the curing of any default and maintenance of payments while the case is pending “on any . . . secured claim on which the last payment is due after the date on which the final payment under the plan is due.”53 It is not clear whether the secured claim on which the last payment must be due after the final payment under the plan is the original $14,000 debt in the example or whether it is the $9,000 allowed secured claim that will actually be paid through the plan after claim splitting under § 506(a). In the example, the last payment on the original contract was due after the 36-month plan would be completed. After claim splitting, the allowed secured claim of the undersecured creditor might have to be dealt with under § 1322(b)(3), rather than under § 1322(b)(5), because the last payment (at the rate of $311.42 per month and 12 percent contract interest) on the allowed secured claim will be due before the last payment under the plan. If the debtor continues paying $311.42 each month through the plan, the creditor’s lien will be satisfied two months before the end of the 36-month plan when the regular monthly payments under the contract at 12 percent interest have paid a present value of $9,000.

[28]

The Bankruptcy Reform Act of 1994 missed an opportunity to define the limits on the power to cure default and maintain payments under § 1322(b)(3) and (b)(5). The 1994 Act amended § 1322(c)(1) to permit a Chapter 13 debtor to cure default under § 1322(b)(3) and (5) with respect to a lien on the debtor’s principal residence “until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.”54 This amendment clarified conflicting case law that in some jurisdictions limited the power of a Chapter 13 debtor to cure default on home mortgages that had not deteriorated to the point of foreclosure sale.55

[29]

As amended, § 1322(c)(1) extends the power to cure default until a foreclosure sale, but only with respect to liens on “the debtor’s principal residence.” Section 1322(c)(1) tells us nothing about the limits on the power to cure default with respect to liens on personal property.56 And what about claims secured by real property that is not the debtor’s principal residence? We know that such claims can be modified under § 1322(b)(2);57 however, even after modification, because of the size of the claim or the mathematics of the plan, debtors will sometimes want to or have to cure default and maintain payments rather than pay the allowed secured claim in full under § 1325(a)(5). The limitation in § 1322(c)(1) to claims secured by a debtor’s principal residence leaves undefined the boundaries of the powers to cure default under § 1322(b)(3) or (b)(5) with respect to claims secured by personal property or other real property. Is the conflicting case law prior to 1994 with respect to home mortgages58 good guidance for the limits to the curing of default for liens on nonresidential real property? Should courts infer a more or less “liberal” attitude toward the curing of default for nonresidential mortgages excluded from § 1322(c)(1)?

[30]

The Bankruptcy Reform Act of 1994 also enacted § 1322(e), which reads, “If it is proposed in a plan to cure a default, the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.”59 Section 1322(e) applies to any Chapter 13 plan that cures a default under § 1322(b)(3) or (b)(5). It is not restricted to residential home mortgages, though the legislative history reveals it was intended to overrule Rake, which required the payment of interest on home mortgage arrearages cured through a Chapter 13 plan.60 On its face, § 1322(e) controls the amount necessary to cure default with respect to any contract entered into after October 22, 1994, without regard to the nature or extent of security for the claim. Curing default on any such contract will involve calculating arrearages “in accordance with the underlying agreement and applicable nonbankruptcy law.”61


 

1  See §§ 101.1 [ General Rules ] § 74.1  General Rules before BAPCPA and 104.1 [ The Power to Modify ] § 74.11  The Power to Modify.

 

2  See § 102.1 [ Surrender or Sale of Collateral ] § 74.5  Surrender or Sale of Collateral before BAPCPA.

 

3  See below in this section.

 

4  11 U.S.C. § 1322(b)(3).

 

5  See §§ 140.1 [ Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 ] § 84.2  Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 and 142.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994 ] § 85.1  Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994.

 

6  See § 142.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994 ] § 85.1  Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994.

 

7  See § 143.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994 ] § 85.2  Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994.

 

8  See § 132.1 [ Nonmonetary Defaults ] § 82.3  Nonmonetary Defaults.

 

9  See discussion of 11 U.S.C. § 1322(b)(5) beginning at § 81.1  Overview: General Rules for Saving Debtor’s Home.

 

10  Compare 11 U.S.C. § 1322(b)(5) (“curing of any default within a reasonable time”), discussed in § 133.1 [ Reasonable Time to Cure Defaults ] § 82.4  Reasonable Time to Cure Defaults.

 

11  Compare 11 U.S.C. § 365(b)(1)(A) (“cures, or provides adequate assurance that the trustee will promptly cure such default”), discussed in § 173.1 [ Debtor Must Cure Defaults and Assure Future Performance ] § 102.2  Debtor Must Cure Defaults and Assure Future Performance.

 

12  See § 133.1 [ Reasonable Time to Cure Defaults ] § 82.4  Reasonable Time to Cure Defaults.

 

13  Tidewater Fin. Co. v. Moffett (In re Moffett), 288 B.R. 721, 731–32 (Bankr. E.D. Va. 2002) (“The Bankruptcy Code . . . allows the debtor to cure a default. § 1322(b)(3) . . . . The proposed Chapter 13 plan in this case preserves Tidewater’s lien, provides for direct payment of the regular installments coming due, and cures the delinquent installment payments within a reasonable period of time. . . . [This plan] fully protects the secured creditor’s rights.”), aff’d, 289 B.R. 55 (E.D. Va. 2003), aff’d, 356 F.3d 518 (4th Cir. 2004).

 

14  See § 132.1 [ Nonmonetary Defaults ] § 82.3  Nonmonetary Defaults.

 

15  See below in this section, and see § 82.1  Prepetition Defaults—When is Property “Sold” at Foreclosure?.

 

16  See § 130.1 [ Prepetition Defaults ] § 82.1  Prepetition Defaults—When is Property “Sold” at Foreclosure?.

 

17  See §§ 46.2 [ Prepetition Repossession, Levy, Sale or Conveyance ] § 46.4  Prepetition Repossession, Levy, Sale or Conveyance and 52.1 [ Turnover of Property ] § 50.1  Turnover of Property.

 

18  See § 130.1 [ Prepetition Defaults ] § 82.1  Prepetition Defaults—When is Property “Sold” at Foreclosure?.

 

19  See § 46.2 [ Prepetition Repossession, Levy, Sale or Conveyance ] § 46.4  Prepetition Repossession, Levy, Sale or Conveyance.

 

20  See below in this section, and see discussion of 11 U.S.C. § 1322(b)(5) beginning at § 81.1  Overview: General Rules for Saving Debtor’s Home.

 

21  11 U.S.C. § 1322(b)(5).

 

22  See below in this section. See also § 128.2 [ Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations ] § 80.14  Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations.

 

23  See § 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2  Interest Rate Anarchy: Present Value before Till.

 

24  See § 128.2 [ Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations ] § 80.14  Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations.

 

25  See § 145.1 [ Accelerating Payment of a Home Mortgage ] § 85.4  Accelerating Payment of a Home Mortgage.

 

26  See §§ 46.2 [ Prepetition Repossession, Levy, Sale or Conveyance ] § 46.4  Prepetition Repossession, Levy, Sale or Conveyance and 52.1 [ Turnover of Property ] § 50.1  Turnover of Property.

 

27  288 B.R. 721 (Bankr. E.D. Va. 2002), aff’d, 289 B.R. 55 (E.D. Va. 2003), aff’d, 356 F.3d 518 (4th Cir. 2004).

 

28  288 B.R. at 731–32.

 

29  See § 83.1  In General: Rake and Contracts before October 22, 1994.

 

30  508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993).

 

31  11 U.S.C. § 1322(e). See § 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994.

 

32  See § 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994.

 

33  11 U.S.C. § 1322(b)(5).

 

34  See discussion of 11 U.S.C. § 1322(b)(5) beginning at § 81.1  Overview: General Rules for Saving Debtor’s Home.

 

35  See §§ 155.2 [ Long-Term Debts ] § 88.9  Long-Term Debts and 171.1 [ Curing Default and Maintaining Payments on Unsecured Debt ] § 101.4  Curing Default and Maintaining Payments on Unsecured Debt.

 

36  United States v. Easley, 216 B.R. 543, 546 (W.D. Va. 1997) (Sub-sections 1322(b)(3) and (b)(5) are mutually exclusive. “In order to give effect to the limitations in § 1322(b)(5), § 1322(b)(3) cannot apply to such long-term mortgages. . . . Section 1322(b)(3) allows for curing default on short-term mortgages, while § 1322(b)(5) allows for curing long-term mortgages on which the final payment is due after the due date of the final payment under the Chapter 13 plan.”). See also In re Lippolis, 228 B.R. 106 (E.D. Pa. 1998).

 

37  See Homeowners Funding Co. v. Skinner, 129 B.R. 60 (E.D.N.C. 1991) (Arguably in dicta, § 1325(a)(5) can be satisfied in a Chapter 13 case when a debtor proposes to bifurcate a home mortgage, cure arrearages, and maintain payments during the life of the plan and after. Treatment of a long-term secured claim under § 1322(b)(5) is the same as providing present value at cramdown under § 1325(a)(5)(B).); In re Gordon, 217 B.R. 973, 975–76 (Bankr. S.D. Ga. 1997) (Debtor can use § 1322(b)(5) to pay a secured tax claim of $36,405 consistent with a prepetition agreement to pay $110 per month notwithstanding that plan would extend IRS’s secured claim well beyond the five-year maximum. Before the petition, debtor executed an installment agreement with the IRS that permitted the debtor to pay $110 per month toward tax obligations in excess of $85,000. The agreement was based on the debtor’s current financial condition, and the IRS could cancel the agreement if the debtor’s financial circumstances changed. Plan proposed to pay the IRS consistent with the prepetition agreement. The United States argued that “the secured claim of the Service can only be paid, under 11 U.S.C. § 1325(a)(5), in full, over five years, with interest.” Court held that § 1322(b)(5) “permits cure and maintenance on ‘any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.’ . . . [T]he plain meaning of this statute encompasses not only mortgage loans but also obligations such as the one before me.” Court harmonized §§ 1325(a)(5) and 1322(b)(5) as follows: “Section 1325(a)(5) . . . requires that a plan . . . permit the creditor to retain the lien (which this plan provides) and distribute property to the secured creditor of a value which is not less than the allowed amount of the claim. . . . Debtor’s plan accomplishes this. Clearly it does not distribute value in cash to the holder of the claim. It does distribute periodic payments to maintain debt service on this obligation to the Internal Revenue Service for the life of the plan. The remaining balance owed the United States is excepted from discharge pursuant to 11 U.S.C. § 1328(a)(1). The total value distributed to the Service, therefore, is the cash reduction in the principal balance which was owed on the date of filing and a nondischargeable unpaid balance. Combining these two value components meets the requirements of § 1325(a)(5). Although I recognize how awkward the terminology makes this analysis, Congress must have intended it to be so; otherwise Section 1322(b)(5) cannot be harmonized with Section 1325(a)(5).”).

 

38  See § 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest.

 

39  See §§ 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest and 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2  Interest Rate Anarchy: Present Value before Till.

 

40  See § 128.2 [ Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations ] § 80.14  Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations.

 

41  See also § 128.2 [ Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations ] § 80.14  Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations.

 

42  See §§ 104.1 [ The Power to Modify ] § 74.11  The Power to Modify and 105.1 [ Valuation, Claim Splitting and Dewsnup ] § 76.1  Valuation, Claim Splitting and Dewsnup.

 

43  See § 155.2 [ Long-Term Debts ] § 88.9  Long-Term Debts. See, e.g., In re Delauder, 189 B.R. 639, 645–47 (Bankr. E.D. Va. 1995) (Direct payment of undersecured car lender separately classifies by silently providing payment in full with interest of the unsecured portion of the claim. “First, Hyundai will receive a greater percentage payment on account of its unsecured claim than do other unsecured creditors. Second, both the secured and unsecured portions of Hyundai’s claim will be paid directly by the debtor, while other unsecured creditors must wait for disbursement by the trustee.” Car loan was a long term debt on which the last installment was due after the last payment under the plan. Applying the five-factor test in In re Husted, 142 B.R. 72 (Bankr. W.D.N.Y. 1992), there is no evidence that the debtor could not pay the car lender through the plan. Debtor did not propose direct payment solely to avoid trustee’s fees. If the long term debt were paid through the Chapter 13 trustee, the percentage distribution to all unsecured claim holders would actually fall from 25% to approximately 18% because the unsecured portion of the car lender’s claim is small and accelerating long term car loan for payment in full during the life of the plan would reduce the money available to unsecured claim holders. In other words, the discrimination in favor of the car lender actually worked to the advantage of other unsecured claim holders. “[A]lthough this court would not, as a routine matter, permit an undersecured automobile loan to be paid directly by a debtor outside the plan, such treatment is not improper in this case. Here, the last payment on the automobile loan is due after the last payment under the plan, the direct payment does not reduce the dividend to unsecured creditors and does not appear to be motivated primarily by a desire to avoid the trustee’s commission, and the plan otherwise complies with all the requirements for confirmation. For these reasons, the court cannot find that the plan unfairly discriminates against general unsecured creditors.”).

 

44  See § 351.1 [ Long-Term Debts ] § 158.7  Long-Term Debts.

 

45  11 U.S.C. § 1322(b)(5).

 

46  See § 133.1 [ Reasonable Time to Cure Defaults ] § 82.4  Reasonable Time to Cure Defaults.

 

47  See § 128.2 [ Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations ] § 80.14  Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations.

 

48  See, e.g., In re Pruett, 178 B.R. 7, 9 (Bankr. N.D. Ala. 1995) (When mortgage can be modified, debtor can cure default and maintain payments under § 1322(b)(5) in a manner that will require payments to the mortgage holder on the allowed secured portion of its claim after completion of payments to other creditors under the plan. Citing In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994), with approval, “the debtor may nevertheless take advantage of § 1322(b)(5) by keeping the same ten and one-half percent contract rate and making the same payments of principal and interest called for by the note during the life of the plan and during such further period of time as is necessary to have the total principal payments equal the amount of the secured claim as valued by the court. This would be a ‘maintenance of payments’ and the payments would be maintained on the ‘secured claim’ as that claim is computed in accordance with § 506(a) and the three to five year limitation on plan payments under § 1322(c) would have no application. . . . The debtor may request a hearing to determine the value of all the property that secures the mortgage of the Bank and retain the same interest rate and make the same payments of principal and interest called for by the original note during the life of the plan and during such further period of time as necessary to pay in full the secured claim as valued by the court. Alternatively, the debtor may change the interest rate and the amount of the monthly payments, but if he does so, the amount of the allowed secured claim must be paid within the five year period.”).

 

49  See above in this section.

 

50  See §§ 148.2 [ What Claims Are Unsecured Claims? ] § 86.3  What Claims Are Unsecured Claims? and 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.

 

51  11 U.S.C. § 1328(a)(1) excepts from discharge in a Chapter 13 case after completion of payments under the plan “any debt . . . provided for under § 1322(b)(5) of this title.” See § 351.1 [ Long-Term Debts ] § 158.7  Long-Term Debts.

 

52  See § 358.1 [ On Liens ] § 162.3  On Liens.

 

53  11 U.S.C. § 1322(b)(5).

 

54  11 U.S.C. § 1322(c)(1), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 301, 108 Stat. 4106 (1994). See § 82.1  Prepetition Defaults—When is Property “Sold” at Foreclosure?.

 

55  See §§ 130.1 [ Prepetition Defaults ] § 82.1  Prepetition Defaults—When is Property “Sold” at Foreclosure? and 144.1 [ Prepetition Foreclosure Judgment: Curing Default, Payment in Full or Modification under § 1322(c)(2)? ] § 85.3  Prepetition Foreclosure Judgment: Curing Default, Payment in Full or Modification under § 1322(c)(2)? and App. I.

 

56  See above in this section, and see § 46.2 [ Prepetition Repossession, Levy, Sale or Conveyance ] § 46.4  Prepetition Repossession, Levy, Sale or Conveyance.

 

57  See § 140.1 [ Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 ] § 84.2  Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994.

 

58  See § 130.1 [ Prepetition Defaults ] § 82.1  Prepetition Defaults—When is Property “Sold” at Foreclosure? and App. I.

 

59  11 U.S.C. § 1322(e), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 305, 108 Stat. 4106 (1994). See § 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994.

 

60  See §§ 134.1 [ In General: Rake and Contracts before October 22, 1994 ] § 83.1  In General: Rake and Contracts before October 22, 1994 and 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994.

 

61  See §§ 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994 and 141.1 [ Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994 ] § 84.3  Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994 for further discussion of § 1322(e) and curing default under § 1322(b)(5).