To circumvent the prohibition on modifying a home mortgage by lowering the interest rate, a creative chapter 13 debtor proposed a plan accelerating payments so the mortgage would be fully paid during the five-year life of the plan.
The debtor’s clever strategy failed, though, because Bankruptcy Judge Eduardo V. Rodriguez of McAllen, Texas, refused to confirm the plan in an opinion on Oct. 27.
Although Section 1322(b)(2) prohibits modifying the rights of a holder of a mortgage on the debtor’s principal residence, Section 1322(c)(2) permits modifying the lender’s rights if the last payment on the mortgage “is due before the date on which the final payment under the plan is due.”
In the case before Judge Rodriquez, the final mortgage payment was due about one year after the five-year term of the plan. The mortgage carried a 17% interest rate.
To avoid the prohibition on modifying a mortgage, the debtor’s plan called for accelerating payments so the mortgage would be paid in full under the plan. Significantly, the plan would have lowered the interest rate to 5%.
Although the lender did not object to the plan and its lower interest rate, Judge Rodriguez said he had an independent duty to determine if the plan complied with the Bankruptcy Code. Because he concluded that the plan violated subsection (b)(2), he refused to confirm.
The mortgage allowed prepayment without penalty. The debtor therefore argued that making the final payment within the five-year term of the plan made the mortgage modification permissible under Section (c)(2), thus allowing the plan to lower the interest rate to 5%. Judge Rodriguez didn’t buy the idea.
Since the mortgage itself permitted prepayment, Judge Rodriquez said that paying off the mortgage early was not a prohibited modification of the lender’s rights. Lowering the interest rate was another matter.
Although the debtor could voluntarily prepay the mortgage, Judge Rodriguez said that the last payment under the mortgage nonetheless would remain due one year after the five-year plan duration. Therefore, he said, the “mortgage matures outside of the life of the plan,” thus making subsection (c)(2) inapplicable.