As an attorney at Bernstein Law Firm who often represents secured creditors in consumer bankruptcies, the rules that apply to Chapter 13 plans are of great interest. One Bankruptcy Code provision that provides a crucial protection to mortgage holders is 11 U.S.C. § 1322(b)(2) which provides that debtors cannot modify the terms of a mortgage relating to the debtor’s primary residence. This means that the debtor cannot modify the principal balance or interest rate.
This rule applies to first mortgages and also to second or later mortgages so long as there is any equity in the property to support the second or later mortgage. For example, if the debtor has a first mortgage in the amount of $100,000 and a second mortgage in the amount of $50,000, the debtor will not be able to modify the terms of the second mortgage if the property is worth even $1 more than the $100,000 owed on the first mortgage.
A recent opinion from the Bankruptcy Court for the Western District of Pennsylvania written by the Honorable Judge Jeffery A. Deller, however, details one situation where a debtor may modify the interest rate on even a first mortgage on the debtor’s primary residence. In the case of Mary Ellen Golash – WD PA 09-27973 – Judge Deller found that a debtor could modify the interest rate on a first mortgage down to 0% in the special circumstance where the mortgage fully matured before the expiration of the Chapter 13 plan term (normally 60 months from the date of the bankruptcy filing).
The Court noted that 11 U.S.C. § 1322(c)(2) provides an exception to 1322(b)(2) where the mortgage term matures before the end of the plan term. So long as the debtor complies with the rules for modifying a secured claim set forth in Section 1325(a)(5)(B)(ii) which require that the debtor provide for full payment of the claim and propose equal monthly payments to the creditor in the plan, the debtor can reduce the interest rate owed to the mortgage holder to 0%.
I found this case to be interesting because it reminded me of the generally strong protections given to primary residence mortgage holders in bankruptcies, but also pointed out one situation where the creditor’s secured claim could be modified.