§ 81.1     Overview: General Rules for Saving Debtor’s Home
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 81.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

It is not unusual for rehabilitation of a home mortgage to be the principal reason for filing a Chapter 13 case.1 Five sections of the Bankruptcy Code conspire to make saving a Chapter 13 debtor’s home more complicated than it should be.

[2]

As discussed above,2 § 1322(b)(2) permits a Chapter 13 plan to modify the rights of holders of secured claims “other than a claim secured only by a security interest in real property that is the debtor’s principal residence.”3 Most home mortgages dragged into Chapter 13 cases are protected from modification by § 1322(b)(2);4 some mortgages—for example, when the lender has collateral other than the debtor’s principal residence—can be modified through the Chapter 13 plan.5

[3]

In the typical case, the home mortgage is protected from modification by § 1322(b)(2), and surrender of the homestead is not an alternative.6 Chapter 13 debtors are rarely able to refinance to take out the mortgage in default at the petition. The typical home mortgage contract contemplates payments for more years than the three- to five-year length of the plan.

[4]

Under these circumstances, the only reasonable alternative for saving a Chapter 13 debtor’s home is to “provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending” consistent with § 1322(b)(5) of the Code.

[5]

Section 1322(b)(5) opens with the phrase “notwithstanding paragraph (2) of this subsection,” indicating congressional intent that the power to cure defaults and maintain payments in § 1322(b)(5) is an exception to the prohibition in § 1322(b)(2) against modification of claims secured only by a security interest in real property that is the debtor’s principal residence. Section 1322(b)(5) is a limited exception to the protection from modification in § 1322(b)(2). It permits the Chapter 13 plan to cure defaults within a reasonable time and maintain payments during the case. It does not authorize other modifications of a mortgage protected by § 1322(b)(2). For example, when the debtor provides for an undersecured home mortgage under § 1322(b)(5), the debtor cannot bifurcate the claim under § 506(a) if the mortgage is protected from modification by § 1322(b)(2).7

[6]

Section 1322(b)(5) states an important limitation: the special power to cure default and maintain payments is limited to claims “on which the last payment is due after the date on which the final payment under the plan is due.”8 The Code provides no guidance how to determine when “the last payment is due” for purposes of § 1322(b)(5). Presumably the mortgage contract controls. Problems arise because “last payment” could mean the last payment on the original amortization schedule, or it could mean the date the mortgage holder accelerated the note and declared the entire balance due.9 Other potential “last dates” can be found in everyday mortgage documents.

[7]

Without discussion, many reported decisions assume that § 1322(b)(5) is available if the original payment amortization is longer than the proposed length of the plan. Many courts have rejected the argument that prepetition acceleration or a foreclosure judgment precludes curing default and maintaining payments under § 1322(b)(5).10

[8]

When Congress amended § 1322(c)(2) in 1994 to fill a crack in the Code with respect to “short term” mortgages, it used the slightly more specific condition that the “last payment on the original payment schedule” must be due before the final payment under the plan.11 Some courts interpreting new § 1322(c)(2) have concluded that a prepetition foreclosure judgment is due in full immediately and thus falls within the reach of § 1322(c)(2).12

[9]

A safe reading of § 1322(b)(5) is that a Chapter 13 debtor can cure defaults and maintain payments if the debtor would have a contract right to make payments for a longer period than the length of the plan but for the prepetition defaults and consequences of default. Put another way, without regard to the protection from modification in § 1322(b)(2), if eliminating all defaults would reinstate a contract with payments extending beyond the plan, the debtor can use § 1322(b)(5). This is the predominant method by which Chapter 13 debtors save their homes.

[10]

Section 1322(b)(5) is worded in terms of claims on which the last payment is due after the date on which the final payment under the plan is due; thus, it is the remaining term of the loan that determines whether curing default and maintaining payments is available, not the original term of the loan. For example, if the original contract term was seven years, and four years of that term remain at the petition, the debtor can use § 1322(b)(5) to cure defaults and maintain payments only if the plan will last less than four years.

[11]

Prior to the 1994 amendments, some of the most difficult Chapter 13 cases involved debtors with a home mortgage protected from modification by § 1322(b)(2), when the mortgage was in default at the petition, and § 1322(b)(5) was not available. Section 1322(b)(5) only applies to claims on which the last payment is due after the final payment under the plan.13 Debtors come into Chapter 13 cases with home mortgages that do not fit the long-term model of § 1322(b)(5). For example, the underlying debt might be a demand note; the note may have matured by its own terms before the filing or may be a short-term mortgage that will mature before the last payment is due under the proposed plan; the debt may have a balloon provision, and the balloon date may have already passed or may be scheduled to occur before the plan will be completed; the underlying debt may have been reduced to a foreclosure judgment that is due in full immediately.

[12]

In cases filed before October 22, 1994, the Chapter 13 debtor was trapped: § 1322(b)(2) prohibits modification of the mortgage and the debtor cannot cure defaults and maintain payments because § 1322(b)(5) is not available. As a last resort, debtors searched for a statutory basis to pay the protected home mortgage in full during the life of the plan without violating the prohibition against modification in § 1322(b)(2). Some courts found permission in the general language of § 1322(b)(3)14 for the plan to provide for payment in full of a mortgage protected from modification by § 1322(b)(2) but not eligible for long-term treatment under § 1322(b)(5).15

[13]

In cases filed after October 22, 1994, amended § 1322(c)(2) permits Chapter 13 debtors to pay “pursuant to § 1325(a)(5)” a home mortgage with respect to which the last payment “on the original payment schedule” is due before the final payment under the plan.16 The reach of new § 1322(c)(2) and the extent to which it permits modification of short-term home mortgages are controversial.17

[14]

Debtor’s counsel should first consider the simple or typical solution for a home mortgage problem in a Chapter 13 case: cure default within a reasonable time and maintain payments under § 1322(b)(5). The interaction among §§ 1322(b)(2), 1322(b)(3), 1322(b)(5), 1325(a)(5) and 506(a) quickly becomes complicated, expensive to litigate and uncertain of outcome for debtors who only want to save their home, not reach the steps of the Supreme Court.


 

1  See § 8.12  Home Mortgage Problems. See also § 105.3  Filing on the Eve of Whatever for discussion of good-faith problems with Chapter 13 plans that only rehabilitate a home mortgage.

 

2  See § 104.1 [ The Power to Modify ] § 74.11  The Power to Modify.

 

3  11 U.S.C. § 1322(b)(2).

 

4  See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

5  See discussion beginning at § 80.1  In General: Claims That Are Not Secured Only by Security Interest in Real Property That Is the Debtor’s Principal Residence.

 

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

 

7  See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman. But see In re Kheng, 202 B.R. 538, 539 (Bankr. D.R.I. 1996) (Chapter 13 debtor can strip down home mortgage to value of collateral by curing default and maintaining payments under § 1322(b)(5) consistent with the original mortgage contract. Allied was owed $96,793 secured by mortgage on the debtors’ principal residence. Value of the property was $75,000, and plan stripped down Allied’s secured claim to that amount. Plan proposed to cure default and to maintain contract payments for the life of the note, a period that extended beyond the term of the plan. Although not altogether clear, it appears that the mortgage was protected from modification by § 1322(b)(2). “Here, the Debtors are not seeking to modify their secured obligation. The Khengs propose to pay Allied’s secured claim under the same term and at the same interest rate as provided for in the note and mortgage. Judge Queenan would have approved a similar scenario in In re McGregor, 172 B.R. 718 (Bankr. D. Mass. 1994). . . . ‘It is true that [Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993)] holds a proposal of payments pursuant to bifurcation constitute [sic] modification of the ‘rights’ of the holder of the secured claim within the meaning of section 1322(b)(2). Presumably, if only subsection (b)(2) were applicable, the payments would have to be completed within five years. But subsection (b)(5) provides independent support for such a plan. Subsection (b)(5) does not require the plan proponent to avoid modification of the ‘rights’ of the secured claim holder. Its command is complied with so long as payments are maintained on the ‘secured claim.’ The amount of the secured claim is determined by valuation pursuant to section 506(a). This wording avoids the fine distinction made in Nobelman, [sic] based on the wording of subsection (b)(2), between modification of the ‘rights’ of a secured claim holder and modification of the ‘secured claim.’ Subsection (b)(5), moreover, provides that its provisions control ‘notwithstanding paragraph (2) of this subsection.’’”).

 

8  11 U.S.C. § 1322(b)(5).

 

9  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 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)?.

 

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

 

11  11 U.S.C. § 1322(c)(2). 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.

 

12  See § 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)?.

 

13  11 U.S.C. § 1322(b)(5).

 

14  11 U.S.C. § 1322(b)(3) permits a Chapter 13 plan to “provide for the curing or waiving of any default.” See § 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations.

 

15  See §§ 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations 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. See, e.g., In re Lippolis, 228 B.R. 106, 114 (E.D. Pa. 1998) (“Generally, sections 1322(b)(3) and (5) allow debtors to cure pre-petition mortgage defaults. . . . ‘Section 1322(b)(3) allows for curing default on short-term mortgages, while [section] 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.’ United States v. Easley, 216 B.R. 543, 546 (W.D. Va. 1997). The Truitt mortgage is long-term, thus, section 1322(b)(5), not section 1322(b)(3), is applicable.” Because debtor acquired property by deed from his mother in violation of mortgage covenants, debtor cannot cure defaults except by reconveying the property to his mother.).

 

16  See 11 U.S.C. § 1322(c)(2), discussed in detail in § 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.

 

17  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.