Cite as: Keith M. Lundin, Lundin On Chapter 13, § 82.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
The debtor entering Chapter 13 with a home mortgage in default is often unable to immediately prevent further defaults after the filing of the petition. Sometimes the filing of the Chapter 13 itself temporarily disrupts the debtor’s finances and contributes to the postpetition default.
For example, § 1326(a)(1) requires a Chapter 13 debtor to commence making the payments proposed by a plan within 30 days after the plan is filed.1 In enlightened jurisdictions, an income deduction order is sent to the debtor’s employer immediately upon the filing of the Chapter 13 case, requiring deductions from the debtor’s income to fund the plan.2 As a consequence, often before the debtor has a working understanding of Chapter 13, the money available to the debtor is reduced by the payments to the Chapter 13 trustee. If the debtor proposes to pay the ongoing mortgage payment directly to the creditor,3 the debtor must instantaneously adjust the household finances to account for the payments to the trustee—an adjustment that is not easy and often results in a temporary disruption in payments to the mortgage holder. If the home mortgage is to be paid by the trustee, the money may begin flowing from the debtor to the trustee, but distributions to the mortgage holder will not begin until confirmation several months after filing. Either way, from the creditor’s standpoint, the filing of the Chapter 13 case creates a postpetition default in payments.
As a result, Chapter 13 plans often need to cure pre- and postpetition defaults to rehabilitate a home mortgage. Many courts, including the U.S. Courts of Appeals for the Fifth and Eleventh Circuits, have held that § 1322(b)(3) and (b)(5) permit a Chapter 13 debtor to cure both postpetition and prepetition defaults through the plan.4 There is logic to this view because both § 1322(b)(3) and § 1322(b)(5) are worded that a Chapter 13 debtor can cure “any default.” Neither section limits the power to cure defaults to prepetition defaults. A strong majority of courts have also concluded that a Chapter 13 debtor can modify a confirmed plan to cure defaults in payments to a home mortgage holder that arise after confirmation.5
The mechanics of curing postpetition defaults vary among jurisdictions. In some jurisdictions, postpetition defaults are added to the prepetition arrearages, and the total is scheduled as a separate arrearage claim to be paid through the plan.6 In other jurisdictions, the prepetition defaults are separately scheduled as the arrearage claim, and the regular monthly mortgage payment is scheduled as if payments began on the date of the petition; thus, postpetition defaults are caught up as part of the ongoing monthly payment of the mortgage. At least two courts have approved this approach by holding that the arrearage claim to be cured through the plan does not include payments that accrued after the petition.7
Calculating the arrearage claim took on added importance after the Supreme Court’s decision in Rake v. Wade.8 In Rake, the Supreme Court held that an oversecured mortgage holder was entitled to pre- and postconfirmation interest on arrearages cured through the plan pursuant to § 1322(b)(5).9 If postpetition defaults are included in the arrearage claim, Chapter 13 debtors will pay more interest, enhancing the mortgage holder’s recovery. Because a substantial portion of the typical mortgage installment is interest, not principal, adding postpetition defaults to the arrearage claim increases the amount of “interest on interest” that the mortgage holder receives. In contrast, if the continuing payment on the mortgage is scheduled to begin (retroactively) as of the date of the petition so that the continuing monthly payment includes missed postpetition installments, then the debtor will simply pay those installments through the plan without additional interest. After Rake, it will usually be in the debtor’s best interest to exclude postpetition defaults from the arrearage claim; it will be to the mortgage holder’s advantage to include postpetition defaults in the arrearage claim.
Postpetition defaults on a prepetition mortgage should not be characterized as postpetition claims under § 1305.10 The plan may need to be modified prior to confirmation to add a class for postpetition mortgage payments that are in default.11
After the Supreme Court’s decision in Nobelman v. American Savings Bank,12 it is arguable that contract late charges and fees are obligations of the debtor that cannot be modified when the debtor cures default and maintains payments on a home mortgage under § 1322(b)(5).13 Postpetition and postconfirmation late charges may become a significant problem in Chapter 13 cases. The typical mortgage contract requires a monthly payment by a certain day of the month. When continuing payment on a home mortgage is made through the Chapter 13 trustee, it will be pure happenstance if the contract due date falls later in the month than the day on which payments are distributed by the trustee. It is thus possible that mortgage payments will accrue late charges each month.14
If unpaid monthly payments that became due after the petition and before confirmation become part of the arrearage claim, then it makes sense that late charges, attorneys’ fees and other charges called for by the contract that accrue after the petition and before confirmation are also elements of the arrearage claim. These other charges may have to be paid with interest as part of curing defaults after Rake or under § 1322(e).15
Postconfirmation late charges called for by the contract require a little more management. The arrearage claim that must be paid to cure defaults under § 1322(b)(5) is calculated at confirmation. Late charges or defaults that occur after confirmation could become part of the arrearage claim through postconfirmation modification of the plan.16
When the debtor cures default on a home mortgage under § 1322(b)(3) or § 1322(b)(5) and proposes to make payments directly to the mortgage holder,17 the debtor should be cautioned to make all payments before the contract due date to avoid accrual of postpetition late charges. Postconfirmation late charges, escrow account shortfalls, force-written insurance premiums and other contract charges that accrue under a mortgage during a Chapter 13 case don’t go away at discharge.18 When the debtor gets a notice of foreclosure almost simultaneously with the discharge, counsel has a tough task to explain why the years of hard work in the Chapter 13 case did not produce the advertised relief.
1 11 U.S.C. § 1326(a)(1). See discussion beginning at § 44.1 First Test of Debtor’s Good Intentions.
2 See § 248.1 [ Order to Debtor’s Employer ] § 125.1 Order to Debtor’s Employer.
3 A bad idea. See § 147.1 [ Direct Payment of Mortgage or Payment by Trustee ] § 85.6 Direct Payment of Mortgage or Payment by Trustee. See also §§ 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise, 103.2 [ Direct Payment of Secured Claims by Debtor ] § 74.8 Direct Payment of Secured Claims by Debtor before BAPCPA and 157.1 [ Direct Payments by Debtor ] § 89.1 Direct Payments by Debtor.
4 Green Tree Acceptance, Inc. v. Hoggle (In re Hoggle), 12 F.3d 1008, 1010–11 (11th Cir. 1994) (Chapter 13 debtor can modify a confirmed plan under § 1329 to cure defaults on payments to home mortgage holder that accrued after the petition and after confirmation. “Section 1322(b)(5) clearly states that a plan may provide for the curing of any default. . . . The plain meaning of § 1322(b)(5) permits cure of any default whether occurring prior to the filing of the petition or subsequent to confirmation of the plan. Thus, § 1322(b)(5) would permit cure of postconfirmation defaults. . . . [T]his result is consistent with legislative intent . . . to permit homeowners to utilize [Chapter 13’s] flexible provisions for debt relief without sacrificing their homes. . . . Congress designed § 1329 to permit modification of a plan due to changed circumstances of the debtor unforeseen at the time of confirmation. . . . [D]efaults, either preconfirmation or postconfirmation, may be cured under appropriate circumstances.”). Accord Mendoza v. Temple-Inland Mortgage Corp. (In re Mendoza), 111 F.3d 1264, 1268 (5th Cir. 1997) (“[W]e find the analysis of the Eleventh Circuit’s decision in Green Tree Acceptance, Inc. v. Hoggle (In re Hoggle), 12 F.3d 1008 (11th Cir.1994) to be better reasoned and persuasive in holding that a Chapter 13 Plan may be modified to cure postpetition defaults through a plan of reorganization. . . . [P]ursuant to § 1322(b)(5), bankruptcy courts are empowered to modify a debtor’s plan to include postpetition arrearages arising from a secured loan, such as a mortgage.”); Metmor Fin., Inc. v. Bailey (In re Bailey), 111 B.R. 151 (W.D. Tenn. 1988); In re Binder, 224 B.R. 483 (Bankr. D. Colo. 1998) (Citing Mendoza v. Temple-Inland Mortgage Corp. (In re Mendoza), 111 F.3d 1264 (5th Cir. 1997), and Green Tree Acceptance, Inc. v. Hoggle (In re Hoggle), 12 F.3d 1008 (11th Cir. 1994), debtor can modify a plan after confirmation to cure postpetition mortgage defaults; however, modified plan must satisfy §§ 1322 and 1325, and debtor is without financial ability to cure the postpetition default within a reasonable time, and the modified plan is not feasible.); In re Mathews, 208 B.R. 506 (Bankr. N.D. Ala. 1997) (Applying Green Tree Acceptance, Inc. v. Hoggle (In re Hoggle), 12 F.3d 1008 (11th Cir. 1994), debtor with stable job and unblemished 19-year payment history to mortgage holder can modify plan after confirmation to make up two payments missed when the debtor’s wife changed jobs.); In re Steele, 182 B.R. 284 (Bankr. W.D. Okla. 1995) (Green Tree Acceptance, Inc. v. Hoggle (In re Hoggle), 12 F.3d 1008 (11th Cir. 1994) correctly concludes that debtor can modify a plan after confirmation to cure arrearages or defaults that accumulate after the petition with respect to a mortgage that is provided for under § 1322(b)(5).); In re Bellinger, 179 B.R. 220, 223 (Bankr. D. Idaho 1995) (“[S]ection 1322(b)(5) can be used to cure both pre-petition and post-petition arrearages.”); In re Comans, 164 B.R. 539 (Bankr. S.D. Miss. 1994); Central Bank v. Thomas (In re Thomas), 121 B.R. 94 (Bankr. N.D. Ala. 1990); In re Gadlen, 110 B.R. 341 (Bankr. W.D. Tenn. 1990); In re Davis, 110 B.R. 834 (Bankr. W.D. Tenn. 1989); In re McCollum, 76 B.R. 797 (Bankr. D. Or. 1987); Jackson v. Boulevard Mortgage Co. (In re Nickleberry), 76 B.R. 413 (Bankr. E.D. Pa. 1987); In re Minick, 63 B.R. 440 (Bankr. D.D.C. 1986); In re Parker, 46 B.R. 106 (Bankr. N.D. Ga. 1985); In re Canipe, 20 B.R. 81 (Bankr. W.D.N.C. 1982). See In re Ford, 84 B.R. 40 (Bankr. E.D. Pa. 1988) (Section 1322(b)(5) does not enable the debtor to cure postpetition defaults in home mortgage payments because the last payment on the debtor’s second mortgage is due before the final payment under the plan. However, § 1322(b)(3) allows a Chapter 13 debtor to cure and waive any default and is not limited by § 1322(b)(2) or by § 1322(b)(5) when the last payment on the obligation is due before the last payment under the plan.).
5 See § 259.1 [ To Cure Postconfirmation Default ] § 127.2 To Cure Postconfirmation Default.
6 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.
7 See In re Hunt, 140 B.R. 333 (Bankr. D. Conn. 1992) (Postpetition, pre-confirmation defaults on a home mortgage are not part of the arrearages that must be paid to “cure defaults” under § 1322(b)(5). If plan is confirmed, mortgage holder will have a right to receive the postpetition, postconfirmation payments, not as an element of curing defaults, but as part of the debtor’s obligation under § 1322(b)(5) to maintain payments while the case is pending.); In re LaLonde, 65 B.R. 237 (Bankr. S.D. Ohio 1986) (Arrearage claim does not include payments that accrued after filing.).
8 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993).
9 See § 134.1 [ In General: Rake and Contracts before October 22, 1994 ] § 83.1 In General: Rake and Contracts before October 22, 1994. An oversecured mortgage holder’s entitlement to interest on arrearages after Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993) was changed by Congress with respect to agreements entered into after October 22, 1994. See 11 U.S.C. § 1322(e), discussed in § 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2 Section 1322(e): Contracts after October 22, 1994.
10 See §§ 204.1 [ Providing for Postpetition Claims ] § 113.6 Providing for Postpetition Claims, 213.1 [ To Provide for Postpetition Creditors ] § 114.5 To Provide for Postpetition Creditors and 302.1 [ Postpetition Claims ] § 137.1 Postpetition Claims before BAPCPA.
11 See §§ 209.1 [ Timing, Procedure and Form ] § 114.1 Timing, Procedure and Form–215.1 [ Opposing a Preconfirmation Modification of the Plan ] § 114.7 Opposing a Preconfirmation Modification of the Plan.
12 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993).
13 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 and 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6 Late Charges, Attorneys' Fees, Costs and Other Charges.
14 But see In re Lee, 167 B.R. 417, 426–29 (Bankr. S.D. Miss. 1992), aff’d, 22 F.3d 1094 (5th Cir. 1994) (Secured claim holder is not entitled to postconfirmation relief from the stay based on minor discrepancies in payments caused by the timing of payments by debtors’ employers to the Chapter 13 trustee and caused by the payment of administrative expenses during the early months of distributions under plans. “While evidence was presented at trial that certain of the Debtors are in arrears under the terms of their confirmed plans, the arrearage amounts are insignificant in relation to the amount of money that the Debtors have paid and are paying into their plans. A post-confirmation default must be material in order to constitute grounds for relief from the automatic stay. . . . Green Tree’s argument that the Court should hold the Debtors responsible for the manner in which the Trustee disburses funds is wholly unfounded. . . . Where an administrative expense, such as the debtor’s attorney fee in this instance, is paid in full during the early part of the plan, other creditors necessarily receive less than their designated portion of the total plan payment during these months of preemption. However, once the preempting administrative expense is paid in full, the creditors then receive a monthly amount greater than the amount designated by the plan for a period of time. Assuming the debtor completes the plan, the creditors will receive the appropriate amount over the life of the plan. . . . [T]he Trustee’s office disburses between 10,000 and 15,000 checks to creditors each month. It would be extremely burdensome for the Chapter 13 Trustee to review every contract involving a home mortgage, determine the due date, and pay each individual creditor in accordance with its particular contract. If Green Tree’s argument were accepted by this Court, then the only way a debtor could comply with the Bankruptcy Code would be to pay any secured creditor protected from modification of its rights under § 1322(b)(2) outside of the plan. Such a result is not mandated by § 1322(b)(2).”).
15 See discussion beginning at § 83.1 In General: Rake and Contracts before October 22, 1994.
16 See § 259.1 [ To Cure Postconfirmation Default ] § 127.2 To Cure Postconfirmation Default.
17 See §§ 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise and 147.1 [ Direct Payment of Mortgage or Payment by Trustee ] § 85.6 Direct Payment of Mortgage or Payment by Trustee for discussion of why this is a bad idea.
18 See 11 U.S.C. § 1328(a)(1), discussed in § 351.1 [ Long-Term Debts ] § 158.7 Long-Term Debts. See, e.g., Telfair v. First Union Mortgage Corp. (In re Telfair), 224 B.R. 243 (Bankr. S.D. Ga. 1998) (Section 506(b) has no application to the allowance of postconfirmation attorney fees and expenses. Neither Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993) nor § 506(b) provides a basis for the debtors’ post-discharge lawsuit against mortgage company with respect to application of payments during plan to the reimbursement of fees and expenses incurred by the mortgage company in filing postconfirmation motions for relief from the stay and “force writing” insurance. Fees and expenses are governed by state law and the terms of the deed of trust.), aff’d, 216 F.3d 1333 (11th Cir. 2000), cert. denied, 531 U.S. 1073, 121 S. Ct. 765, 148 L. Ed. 2d 666 (2001).