Series: #7 0f 13
Previously, we took a look at reasons why a debtor might be disqualified from filing Chapter 7, and have to file for bankruptcy under Chapter 13. Now, we will begin to discuss reason why a debtor would want to file a Chapter 13 instead of Chapter 7, the first being curing a mortgage.
What does Curing a Mortgage Mean? How does it Affect My Bankruptcy?
Put simply, a mortgage is cured by paying all outstanding payments currently in arrears, along with any fines, late fees, attorney’s fees, and any penalties that may be due and owing.
Mortgage creditors are afforded special protection in Chapter 13; a debt secured by a principal residence of the debtor cannot be modified through the filing of a bankruptcy. See 11 U.S.C. §1322*(b)(5) and Nobleman v. American Savings Bank, 113 S. Ct. 2106 (1993)*, holding that home mortgages secured only by the debtor’s personal residences cannot be modified to discharge any unsecured portion of the claim.
With the few exceptions discussed below, a Chapter 13 is useful for curing mortgage arrears, as it provides up to five years to accomplish the cure.
In Indiana, a sheriffs’ sale is not final until the gavel falls, and many Chapter 13’s are filed on the eve of the sale to save the family home.
When curing a mortgage in a plan, the cure runs through the month that the petition is filed and the current mortgage payments begin the following month.
When setting up a mortgage cure in a plan, it is important to estimate the amount of the arrears as closely as you can. Note that pursuant to Southern District of Indiana General Order 09-0005, for all cases filed on or after August 1, 2009, if there is a pre-petition arrearage claim on a mortgage secured by the debtor’s residential real property, then both pre-petition arrears and post-petition mortgage installments shall be made through the trustee.
Keep in mind then that the mortgage installment is also subject to the trustee percentage fee (currently anywhere from 6.5-10% in the Indianapolis division).
Exceptions to Curing a Mortgage
- Balloon mortgages.
Plans can also propose to “cure” a balloon payment. If the balloon payment became due before the Chapter 13 was filed, and can be paid in full over the life of the plan, several cases hold that this is a proper use of a Chapter 13. See In re Nepil, 206 B.R. 72 (Bankr. D.N.J. 1997) and In re Chang, 185 B.R. 50 (Bankr. N.D. Ill. 1995), interpreting §1322(c)(2) to allow the payment of a balloon mortgage that matured pre-petition.
It is not as clear whether an unmatured balloon payment (unmatured at the date of filing) can be cured in a Chapter 13 plan. Arguably, if the balloon payment becomes due during life of the plan, it is proper to provide for the full payment in the plan. Again, it is important to provide both the amount of the balloon and the interest factor.
- Cramming a mortgage – cross-collateralization.
In some limited instances, case law has provided circumstances in which a residential mortgage can be crammed.First, if the mortgage is cross-collateralized with any other collateral, it loses the protection afforded under the Code. §1322(b)(2) provides that secured claim holders may be modified “other than a claim secured only by a security interest in real property that is the debtor’s principal residence.”
Case law has interpreted that to mean if the real estate is income-producing (rental income), if the mortgage includes the residence and commercial property, or if the mortgage includes the residence and equipment, other acreage or anything other than the personal residence, the mortgage can be “crammed” to the fair market value.
If you have a mortgage that you wish to cram, valuation becomes the primary issue, and value agreements become more difficult to orchestrate. If you are attempting a mortgage cram, it would be in your best interests to have a recent appraisal of the property available to the creditor to substantiate your offer.
Also, remember that you need to deduct the value of the other pledged collateral, and the other pledged collateral must also be provided for in the plan – either with a payment offer or to surrender.
- Cramming an undersecured junior mortgage.
Additionally, there have been some decisions that allow the debtor to cram a junior mortgage if there is absolutely no equity to support the note. For more about this issue, see:
- Matter of Sanders, 202 B.R. 986 (Bankr. D. Neb. 1996), holding that the “creditor must have a secured claim in both the literal and Code sense to have its rights protected by the anti-modification clause.”
- In re Geyer, 203 B.R. 726 (Bankr. S.D. Cal. 1996), “where the estate’s interest in property is zero, the claim under §506(a) is completely unsecured and thus not entitled to §1322(b)(2) protection.”
In determining the amount of equity available to support a mortgage, you may not deduct any exemptions to which the debtor may be entitled. Again, an appraisal is vital in attempting this type of cram.
- Tax Sale Redemption.
A Chapter 13 plan may be proposed to allow for the redemption of a property from a tax sale.In Indiana, a debtor has one year from the date of the tax sale to redeem the subject real estate.
The trustee is often reluctant to take on the responsibility of redeeming tax sale properties due to the changing redemption amount and deadline for making the redemption. As a result, the trustee will usually require the redemption to be accomplished outside the plan by the debtor prior to the payment of any mortgage arrears by the Trustee.
Another possibility is that the mortgage creditor may redeem the property, and then include the redemption amount in their arrears claim. This is probably the best method because the mortgage company is assured that the property has been redeemed, and they are often in a position to redeem it much more quickly than is the debtor.