§ 84.3     Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 84.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

As discussed above,1 the Bankruptcy Reform Act of 19942 changed the rules for calculating the amount that must be paid to cure default through a Chapter 13 plan for all contracts entered into after October 22, 1994. New § 1322(e) states that the amount necessary to cure default “shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.”3 Section 1322(e) is effective for agreements entered into after October 22, 1994.4

[2]

For contracts after October 22, 1994, § 1322(e) applies the contract terms and nonbankruptcy law to determine the amount necessary to cure default without regard to whether the claim is oversecured or undersecured.5 In cases controlled by § 1322(e), postpetition interest on arrearages is required only if the underlying agreement requires the payment of interest on defaults and nonbankruptcy law does not prohibit the interest allowed by the agreement.6 Typically, the calculations under § 1322(e) will not require two different interest periods as required under Rake v. Wade.7 This will somewhat simplify calculating payments to cure defaults with respect to mortgages entered into after October 22, 1994.

[3]

If the contract and state law allow the mortgage holder interest on unpaid installments and other charges, then the calculations necessary to cure default through a plan under § 1322(b)(5) will be similar to the examples in the section above, except that the rate of interest will be determined by the contract and nonbankruptcy law and will probably be a unitary rate during both the pre- and postconfirmation periods. Also, interest on arrearages (or on whatever portion of the arrearages is subject to interest under the contract and nonbankruptcy law) will accrue preconfirmation and postconfirmation without regard to whether the claim is oversecured or undersecured.8 If the contract or other law only permits interest on the unpaid principal, then slightly different calculation will be necessary.

[4]

Assume again a $50,000 mortgage at 10 percent interest payable over 20 years. Assume the debtor was four months behind at the petition, that these were the first four payments under the contract and that confirmation occurs three months after the petition. Assume further that the mortgage is protected from modification and that the debtor is financially able only to cure defaults and maintain payments under § 1322(b)(5). You will recall that the $1,932 of arrears at the petition was composed of $267 of principal and $1,665 of interest. If the contract and nonbankruptcy law only allow interest on unpaid principal, then, to cure defaults, the debtor would have to pay the entire $1,932 of arrears, but the mortgage holder would only be entitled to interest on the $267 principal portion of the arrears. Without regard to whether the mortgage is oversecured or undersecured,9 the $267 of unpaid principal would accumulate contract interest at 10 percent for the three months before confirmation, which would grow the principal portion of the arrearage claim to $274. The debtor would have to pay that $274 with contract interest after confirmation. The interest portion of the arrearage, $1,665, would have to be paid in full to cure default but would not be entitled to interest before or after confirmation.

[5]

These calculations become stranger if the contract is not protected from modification by § 1322(b)(2) and the contract and nonbankruptcy law permit interest on principal only. The plan can strip down the mortgage to the value of the collateral ($30,000 in the example). The $1,932 arrearage is properly divided into its interest ($1,665) and principal ($267) components. The $267 principal portion accrues interest before and after confirmation at the rate provided by contract so long as that rate is not prohibited by nonbankruptcy law.

[6]

If the $1,932 arrearage is considered to be part of the $30,000 allowed secured claim, then payments on the interest portion of the arrearage and payments on the principal portion of the arrearage should both be credited against the $30,000 allowed secured claim. It might be helpful to break the default curing payment into two payments: one toward the $1,665 arrearage that was prepetition interest that is paid without interest; one toward the $267 of prepetition principal that is paid with pre- and postconfirmation interest. In the example, the first payment would be $69 ($1,665 without interest paid in 24 months), and the second payment would be $12.64 ($274 with 10 percent interest paid in 24 months). All of each $69 payment would be credited to the $30,000 allowed secured claim. The principal portion of each $12.64 payment would be credited against the allowed secured claim.

[7]

All of the problems of allocating the regular $483 payment to principal and interest discussed above10 remain with respect to contracts entered into after October 22, 1994. Section 1322(e) directs Chapter 13 practitioners to the contract and nonbankruptcy law to determine the amount necessary to cure default, but § 1322(e) tells us nothing about allocating the regular monthly payment or the arrearage payment(s) to principal and interest when received by the mortgage holder. The fundamental difficulty remains—with respect to the ongoing monthly payment, is it divided to principal and interest according to the original ($50,000) amortization or the new $30,000 amortization when the mortgage can be modified and the allowed secured claim is different from the original principal amount of the mortgage? It is unlikely that mortgage contracts or state law will be much help with this uniquely bankruptcy problem of allocation of principal and interest when a Chapter 13 debtor cures default through a confirmed plan.

[8]

The problem of double recovery of principal by mortgage holders discussed above11 will persist under the new law. Chapter 13 debtors must be vigilant for the filing of arrearage claims that include principal when that same slice of principal is also included in the contract balance. That some mortgage holders will only be entitled to interest on the principal portion of arrearages with respect to contracts entered into after October 22, 1994, should reduce the doubling (tripling) of interest that is possible under Rake and prior law.12

[9]

Calculating plan payments to cure default could become more complicated if mortgage drafters respond to new § 1322(e). Section 1322(e) defers to the underlying agreement and nonbankruptcy law for the amount necessary to cure default on a home mortgage executed after October 22, 1994. Clever provisions in mortgages for curing defaults in bankruptcy cases will be rewarded by § 1322(e), limited only by nonbankruptcy law. There is a field day ahead for the attorneys who draft mortgage instruments as they conceive new default provisions. The mortgage companies that have feasted on interest on interest after Rake can be expected to approach state legislatures with new ideas about what nonbankruptcy law should allow when the borrower files bankruptcy.


 

1  See §§ 129.1 [ Overview: General Rules for Saving Debtor’s Home ] § 81.1  Overview: General Rules for Saving Debtor’s Home and 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994.

 

2  Pub. L. No. 103-394, 108 Stat. 4106 (1994).

 

3  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.

 

4  See Pub. L. No. 103-394, § 702(b)(2)(D), 108 Stat. 4106 (1994).

 

5  See §§ 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994 and 137.1 [ Undersecured Mortgage and Interest to Cure Default ] § 83.5  Undersecured Mortgage and Interest to Cure Default.

 

6  See § 136.2 [ Rate of Interest to Cure Default: Contracts after October 22, 1994 ] § 83.4  Rate of Interest to Cure Default: Contracts after October 22, 1994.

 

7  508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993). See § 136.1 [ Rate of Interest to Cure Default: Contracts before October 22, 1994 ] § 83.3  Rate of Interest to Cure Default: Contracts before October 22, 1994.

 

8  See § 137.1 [ Undersecured Mortgage and Interest to Cure Default ] § 83.5  Undersecured Mortgage and Interest to Cure Default.

 

9  See § 137.1 [ Undersecured Mortgage and Interest to Cure Default ] § 83.5  Undersecured Mortgage and Interest to Cure Default.

 

10  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, 129.1 [ Overview: General Rules for Saving Debtor’s Home ] § 81.1  Overview: General Rules for Saving Debtor’s Home, 136.1 [ Rate of Interest to Cure Default: Contracts before October 22, 1994 ] § 83.3  Rate of Interest to Cure Default: Contracts before October 22, 1994, 136.2 [ Rate of Interest to Cure Default: Contracts after October 22, 1994 ] § 83.4  Rate of Interest to Cure Default: Contracts after October 22, 1994 and 137.1 [ Undersecured Mortgage and Interest to Cure Default ] § 83.5  Undersecured Mortgage and Interest to Cure Default.

 

11  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 and 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.

 

12  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, 129.1 [ Overview: General Rules for Saving Debtor’s Home ] § 81.1  Overview: General Rules for Saving Debtor’s Home, 134.1 [ In General: Rake and Contracts before October 22, 1994 ] § 83.1  In General: Rake and Contracts before October 22, 1994, 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994 and 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.