Cite as: Keith M. Lundin, Lundin On Chapter 13, § 8.12, at ¶ ____, LundinOnChapter13.com (last visited __________).
Chapter 13 debtors can rehabilitate home mortgages notwithstanding prepetition default, acceleration and commencement of foreclosure proceedings.1 In the Bankruptcy Reform Act of 1994, Congress made it explicit that this power to rehabilitate home mortgages extends until the residence is sold at a foreclosure sale and includes the power to pay in full through the plan a mortgage that has ballooned, has matured or is payable on demand before the completion of payments under the plan.2
The Chapter 13 petition stops any pending foreclosure,3 and the plan then controls the relationship between the debtor and lienholders. If the debtor needs to modify the mortgage, Chapter 13 can be a safe haven while mortgage modification is processed by a lender. Some bankruptcy courts have special mortgage mitigation programs available to Chapter 13 debtors that force mortgagees and servicers to undertake good-faith efforts at mortgage modification.4
The Chapter 13 debtor can cure mortgage defaults through a plan on terms defined in large part by the debtor and the debtor’s budget.5 If things don’t go perfectly during the years of the Chapter 13 case, even postpetition defaults in payments to a mortgagee or servicer can be cured through the Chapter 13 plan.6
If the debtor wants to sell mortgaged property, a carefully worded plan can be the most favorable bankruptcy platform for the sale.7 The Chapter 13 debtor remains in control of all estate property during the case, and the debtor, not a trustee, will control the method and terms of any sale.8
For any debtor with a tortured mortgage history, Chapter 13 is the better bankruptcy bet. Mortgage holders and servicers are notoriously incapable of accurately accounting for payments, charges and fees, in or out of bankruptcy.9 Chapter 7 provides no foil to this problem; Chapter 13 does. In a Chapter 13 case, the presence of a trustee and the power to cure default and maintain payments through a plan gives the debtor years in which to both fix the problems of the past and establish a solid record of performance, with accurate accounting that is verifiable. During the Chapter 13 case—and only in Chapter 13—the Bankruptcy Rules require the mortgagee or servicer to give notice of all payment changes and of all postpetition fees, charges and expenses.10 At the end of the Chapter 13 case, there will be an order finding the mortgage is current, or there will be a known default amount that can be addressed before the lienholder seeks to foreclose.11 In sum, a Chapter 13 case stops the prepetition foreclosure, provides a warm platform for modification or at least rejuvenation, delivers safety from payment shocks and expense surprises for the life of the plan and launches the debtor into the post-bankruptcy world with a rehabilitated home mortgage.
In a Chapter 7 case, a debtor with a home mortgage will usually have to negotiate a reaffirmation agreement to keep the house. Typically, the lender will require that the mortgage be current as a condition of reaffirmation or, at least, that the debtor will become current on the lender’s terms. The debtor with even a substantial mortgage arrearage can cure the default over time and rehabilitate the mortgage without creditor cooperation in a Chapter 13 case.
Chapters 11 and 12 can also be used to rehabilitate home mortgages, but the use of Chapter 11 to manage debt on a principal residence was dramatically reduced by Code amendments in 1994. With respect to cases filed before October 22, 1994, Chapters 11 and 12 had the advantage over Chapter 13 that, in addition to the power to reinstate the original mortgage terms, the debtor could modify, extend and change the terms of a home mortgage if a plan was confirmed.12 In 1994, Congress restricted a Chapter 11 debtor’s powers with respect to residential mortgages by adding § 1123(b)(5), which prohibits modification of claims secured only by real property that is the debtor’s principal residence in a Chapter 11 case—the identical restriction applicable to Chapter 13 debtors under § 1322(b)(2).13 Because few individual debtors can also qualify as “family farmers” or “family fishermen” for purposes of Chapter 12, and because, after the 1994 amendments, Chapter 11 provides no obvious advantages with respect to management of a residential mortgage, Chapter 13 remains the chapter of choice to rehabilitate an individual debtor’s home mortgage.14
2 See 11 U.S.C. § 1322(c), as redesignated and 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?, § 82.2 Postpetition Defaults, § 82.3 Nonmonetary Defaults, § 85.1 Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994, § 85.2 Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994 and § 85.3 Prepetition Foreclosure Judgment: Curing Default, Payment in Full or Modification under § 1322(c)(2)?.
3 Unless no stay arises because of two or more dismissed bankruptcies within a year. See 11 U.S.C. § 362(c)(4), discussed in § 61.1 When Does § 362(c)(4) Apply?, § 61.2 Procedure, Timing and Form for Imposing Stay, § 61.3 (Rebuttable) Presumption of Lack of Good Faith and § 61.4 Proof of Good Faith.
Bankr. D. Ariz., http://www.azb.uscourts.gov/mortgage-modification-mediation
Bankr. M.D. Fla., http://www.flmb.uscourts.gov/mortgage_modification/
Bankr. N.D. Fla., http://www.flnb.uscourts.gov/mortgage-modification-mediation
Bankr. S.D. Fla., http://www.flsb.uscourts.gov/?page_id=4587
Bankr. N.D. Ind., http://www.innb.uscourts.gov/pdfs/Loss_Mitigation_Procedures_final.pdf
Bankr. E.D.N.Y., http://www.nyeb.uscourts.gov/sites/nyeb/files/ord_582.pdf
Bankr. N.D.N.Y., http://www.nynb.uscourts.gov/?q=loss-mitigation
Bankr. S.D.N.Y., http://www.nysb.uscourts.gov/loss-mitigation
Bankr. W.D. Pa., http://www.pawb.uscourts.gov/loss-mitigation-program
Bankr. D.R.I., http://126.96.36.199/loss_mitigation2
Bankr. E.D. Wis., https://www.wieb.uscourts.gov/mortgage-modification-mediation
See Bankr. N.D. Ill., http://www.ilnb.uscourts.gov/filing-without-attorney which provides link to Circuit Court of Cook County Mortgage Foreclosure Mediation Program
5 See 11 U.S.C. § 1322(b)(5), discussed in § 81.1 Overview: General Rules for Saving Debtor’s Home, § 82.1 Prepetition Defaults—When is Property “Sold” at Foreclosure?, § 82.2 Postpetition Defaults, § 82.3 Nonmonetary Defaults, § 82.4 Reasonable Time to Cure Defaults, § 83.1 In General: Rake and Contracts before October 22, 1994, § 83.2 Section 1322(e): Contracts after October 22, 1994, § 83.3 Rate of Interest to Cure Default: Contracts before October 22, 1994, § 83.4 Rate of Interest to Cure Default: Contracts after October 22, 1994, § 83.5 Undersecured Mortgage and Interest to Cure Default, § 83.6 Late Charges, Attorneys' Fees, Costs and Other Charges, § 84.1 In General, § 84.2 Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 and § 84.3 Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994.
8 See 11 U.S.C. §§ 1303 and 1306(b).
9 See, e.g., In re Taylor, No. 12-11463-NPO, 2013 WL 1276507, at *7 (Bankr. N.D. Miss. Mar. 27, 2013) (Olack) (“Why were the errors not caught when GMAC filed the 2012 Claim and why did it take GMAC eight (8) months to determine that the 2012 Claim was incorrect? Is there a systemic problem with GMAC’s loan-servicing computer system? GMAC’s inability to accurately calculate payments and charges dates back to the 2005 Case, as evidenced by the 2005 Amended Claim. GMAC cannot rely on its own records as evidence of an arrearage when GMAC has not shown that those records are more accurate as of the date of the Hearing than they were shortly before the Hearing.”); In re Parsley, 384 B.R. 138, 164 (Bankr. S.D. Tex. Mar. 5, 2008) (Bohm) (“What this Court does not understand is why Countrywide’s original loan payment history is so complex that McCalla Raymer . . . must simplify the history so that this Court—and other Courts—will be able to comprehend the payment history. Is it too much to ask of Countrywide, or any mortgagee or servicer, to generate a payment history that does not have to be simplified by legal assistants who inevitably will make mistakes? Countrywide’s payment histories are so complex that judges, attorneys, and borrowers have difficulty understanding them. Indeed, these payment histories are sufficiently confusing that many debtors and their attorneys are unable to determine if Countrywide has overcharged them.”). See also Danielle Douglas, Consumer Bureau Hands Down Stricter Rules for Mortgage Servicers, Washington Post (Jan. 16, 2013) (“The horror stories were astonishing: Homeowners being kicked out of their homes on the basis of forged documents. Others were working with mortgage servicers to lower their monthly payments while simultaneously being placed in foreclosure by the same company.”), available at http://www.washingtonpost.com/business/economy/consumer-bureau-hands-down-stricter-rules-for-mortgage-servicers/2013/01/16/4fd70eba-5f4a-11e2-a389-ee565c81c565_story.html; Gretchen Morgenson, From East to West, Foreclosure Horror Stories, N.Y. Times (Jan. 7, 2010) (discussing Nevada’s lawsuit against Lender Processing Services, “The complaint, which came after a 14-month inquiry, contends that [Lender Processing Services] deceived consumers by committing widespread document execution fraud, misrepresenting its fees and making deceptive statements about its efforts to correct paperwork.”), available at http://www.nytimes.com/2012/01/08/business/mortgage-servicing-horror-stories-fair-game.html?pagewanted=all.
10 See Fed. R. Bankr. P. 3002.1, discussed in § 131.3 Bankruptcy Rule 3002.1: Mortgage Management after 2011.
12 See 11 U.S.C. §§ 1123(a)(5), 1222(b)(2). See, e.g., First Fed. Bank of Cal. v. Weinstein (In re Weinstein), 227 B.R. 284, 291 n.5 (B.A.P. 9th Cir. Nov. 10, 1998) (Russell, Jones, Ollason) (In a Chapter 11 case filed just before the 1994 amendments, individual debtor can strip down residential mortgage notwithstanding that debtor would not be able to do so in a Chapter 13 case. In a note, “individuals can not be forced to involuntarily proceed by way of Chapter 13. See [Toibb v. Radloff, 501 U.S. 157, 165–66, 111 S. Ct. 2197, 115 L. Ed. 2d 145 (June 13, 1991)]. Thus, the bankruptcy court correctly refused to apply Chapter 13 principles in this Chapter 11 case.”).
13 See Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 206, 108 Stat. 4106 (1994).
14 See also § 8.4 Chapter 12 Not Available or Not Helpful.