In a defeat for consumers, the Fourth Circuit held that the power to “cure” does not allow a chapter 13 debtor to lower the interest rate on a home mortgage to the non-default rate.
A couple defaulted on their home mortgage before bankruptcy. The mortgage called for the interest rate to climb two percentage points after default. Also before bankruptcy, the lenders gave notice invoking the higher rate.
The debtors’ chapter 13 plan called for curing the defaults within the five-year duration of the plan. The plan reinstated the contractual maturity date and provided that the interest rate on the cure payments and the regularly monthly payments would be the lower non-default rate.
The bankruptcy court sustained the lender’s objections to the plan. The plan confirmed by the court required the higher default rate for all payments on the mortgage and the arrears. The debtors appealed. They lost in district court and lost again in an April 27 opinion by Circuit Judge J. Harvie Wilkinson III.
Judge Wilkinson framed the question as whether the ability to cure default under Sections 1322(b)(3) and (5) trumps Section 1322(b)(2), which precludes modifying a “claim secured only by a security interest in real property that is the debtor’s principal residence.” In ruling that the debtors could not reinstate the lower non-default rate, he held that subsections (3) and (5) do not undo a “residential mortgage lender’s fundamental rights.”
Analyzing the legislative history and the language of the statutes, Judge Wilkinson concluded that Congress drew a “clear distinction between plans that merely cure defaults and those that modify the terms of residential mortgage loans.” Lowering the interest rate, he said, would modify the loan. He also said that the inability to impose default rates of interest might “motivate fewer lenders to engage in mortgage lending in the first place.”
Neither the circuit court’s opinion nor the debtors’ briefs cited cases on the ability in chapter 13 to reinstitute the lower contract rate on a home mortgage once a default rate has been imposed before bankruptcy.