The "cure" to the Homeowner's Bankruptcy Blues: an Analysis of a Homeowner's Ability to Cure His Mortgage Default Under § 1322(b)(5) of the Bankruptcy Code

• Publication year: 2017

The "Cure" to the Homeowner's Bankruptcy Blues: An Analysis of a Homeowner's Ability to Cure His Mortgage Default under § 1322(b)(5) of the Bankruptcy Code

Andriana Glover

THE "CURE" TO THE HOMEOWNER'S BANKRUPTCY BLUES: AN ANALYSIS OF A HOMEOWNER'S ABILITY TO CURE HIS MORTGAGE DEFAULT UNDER § 1322(B)(5) OF THE BANKRUPTCY CODE

Abstract

Chapter 13 bankruptcy is often defaulted homeowners' only avenue to avoid foreclosure and remain in home. Debtors seeking to save their homes usually rely on § 1322(b)(5) which provides that a debtor may "cure" a default. Many mortgage lenders object to debtors' plans proposing to cure the mortgage default on the grounds that the plan is modification of their rights, forbidden by § 1322(b)(2). The Bankruptcy Code neither defines "cure" nor "modification," leaving it up to the courts to draw the line between what constitutes a permissible cure and a forbidden modification.

The Circuit courts interpret the curative powers broadly: granting the debtor the ability to provide provisions in his plan that would restore him to his pre-default conditions. However, in a recent decision, the Fourth Circuit split from the other circuits' interpretation. The Fourth Circuit narrowed the scope of the debtor's curative powers to allow the debtor to only decelerate the mortgage debt and continue making his monthly mortgage payments. The Fourth Circuit erred in interpreting the curative provisions so narrowly. The court failed to thoroughly apply tools of statutory interpretation and address key points in its analysis.

A correct and thorough interpretation of the statute supports a broad interpretation of the curative powers, unrestricted by the anti-modification provision in § 1322(b)(2). To avoid further error in the courts, Congress should amend the Code to include a provision that defines a cure as a debtor's ability to nullify the consequences of default and restore the debtor to his pre-default conditions. Subsequently, Congress should amend the anti-modification provision in § 1322(b)(2) to include that a cure of a default under paragraphs (3) and (5) of this subsection is not a modification of the creditor's rights for purposes of this section.

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INTRODUCTION

Homeownership—the quintessential American Dream. Purchasing a home is not only regarded as a sound investment, but homeownership provides an individual with a strong sense of pride, personal attachment, and community. However, for many, the American Dream has become a daunting nightmare in the face of the possibility (or reality) of foreclosure. High unemployment rates, predatory lending practices by the mortgage companies, and other financial hardships have made it increasingly difficult for many homeowners to satisfy their mortgage terms.¹ For instance, between 2007 and 2010, approximately two to three million Americans lost their homes in foreclosure. An additional two million homeowners were in default and facing the possibility of foreclosure.²

Foreclosure is a detriment to all parties involved. Lenders must bear the burden of high transaction costs and legal fees associated with the foreclosure proceedings. The value of neighboring properties declines.³ Worst of all, the foreclosed homeowner must bear the monetary and emotional costs associated with displacement. Filing for chapter 13 bankruptcy is often a last resort for individuals seeking to avoid foreclosure, and possibly homelessness.⁴ Approximately ninety-six percent of debtors that file chapter 13 are homeowners, and seventy-nine percent of chapter 13 plans provide for the payment of mortgage arrearages.⁵

Chapter 13 bankruptcy helps a debtor save his home in three ways.⁶ First, chapter 13 stays foreclosure proceedings and allows a debtor to create a repayment plan to pay his arrearages.⁷ Second, the debtor may be able to

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challenge excessive fees and penalties imposed by his home mortgage lender.⁸ Third, the debtor may also be able to discharge some of his unsecured debt, allowing him to allocate more income to the payment of his home mortgage lender.⁹

This Comment focuses on the first of the three ways that chapter 13 serves as a vehicle for the debtor to save his home: the plan. Section 1322 of the Bankruptcy Code (the Code) provides guidance on the contents of a chapter 13 plan.¹⁰ Among the permissive provisions listed in § 1322(b), the Code provides that a debtor may cure any default.¹¹ Most chapter 13 debtors rely on these provisions to save their homes. Debtors seeking relief from second mortgages or almost-matured first mortgages may rely on § 1322(b)(3).¹² Most mortgage payments are spread out over twenty to thirty years, and will not have matured during the life of plan. Therefore, debtors seeking to save their homes predominately rely on § 1322(b)(5).¹³ The debtor's ability to cure the default on his mortgage loan is not completely unchecked, however. Though a debtor may propose a plan that cures the mortgage default, § 1322(b)(2) prohibits a debtor from modifying the rights of his home mortgage lender.

Many mortgage lenders have objected to provisions in debtors' plans regarding their mortgage loans. The objection arises from a debtor attempting to cure the default and the creditor claiming that the debtor is, in fact, modifying their rights.¹⁴ The Code, however, neither defines the phrase "cure a default" in § 1322(b)(5), nor provides guidance on what "rights" § 1322(b)(2) prohibits a debtor from modifying.¹⁵ The lack of guidance from the Code has left it up to the courts to draw the line between what constitutes a permissible cure or a forbidden modification.¹⁶

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Most mortgages contain an acceleration clause.¹⁷ This clause provides that in the event of default, the mortgage lender has the right to declare the entire mortgage debt due.¹⁸ Though acceleration of debt is a common consequence of default, it is not the only consequence that a homeowner may face if he defaults on his home mortgage loan. Some mortgage instruments also contain a default interest clause.¹⁹ This clause requires that if the borrower fails to make his monthly mortgage payment per the terms of the mortgage instrument, the borrower must pay an increased interest rate for the remainder of the loan.²⁰

The courts generally agree that though the debtor's promissory note may grant the creditor rights to accelerate the mortgage, decelerating the mortgage debt and allowing a debtor to continue making his monthly payments, is a permissible cure.²¹ In doing so, the circuits have defined the curative power broadly. Such a grant of curative power may allow a debtor to return to his pre-default conditions.²² However, in April 2016, the Fourth Circuit interpreted the phrase, "cure the default" in § 1322(b)(5) more narrowly. The Fourth Circuit definition applies when the debtor's default resulted in a higher interest rate in addition to the acceleration of his mortgage.²³ The court did three things in its decision in Anderson v. Hancock. First, the court restricted the definition of "cure" to only allow the debtor to decelerate his mortgage debt that had been previously accelerated pursuant to the acceleration clause in the mortgage instrument.²⁴ Next, the court held that when a debtor attempts to undo any other events triggered by default, it is a modification of the creditor's rights forbidden by § 1322(b)(2).²⁵ Ultimately, the court refused to confirm the debtor's plan that allowed the debtor to continue making mortgage payments at pre-default interest rates.

Consider the following illustration that demonstrates the distinction between the board and narrow interpretation of curative powers: Deborah Debtor purchases Blackacre. Her promissory note provides that if she fails to

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make her monthly mortgage payment within thirty days from the due date she is in default. The promissory note goes on to state that if she defaults, the mortgage company may accelerate the debt and require her to pay her monthly mortgage payments in two installments per month rather than one.

When applying the broad interpretation of the curative powers, Deborah Debtor would be able to create a repayment plan that provides for the repayment of her arrearages and a return to her pre-default conditions: unaccelerated debt and paying her monthly mortgage payment in one installment per month. However, under the narrow interpretation of a cure proffered by the Fourth Circuit in Anderson, Deborah Debtor would be able to create a plan that decelerates the debts and allows her to continue making payments on Blackacre. She would have to continue making those payments in two installments per month, rather than one. The Fourth Circuit's narrow definition of a cure further handicaps the debtor's attempts to remain in the debtor's home and avoid foreclosure. The stakes are too high to leave it to chance that other circuits will adopt and apply this narrow definition to debtors seeking to save their homes.

Congress should amend the Code to include a provision that defines a cure as a debtor's ability to nullify the consequences of default and restore the debtor to his pre-default conditions. Additionally, Congress should amend the anti-modification provision in § 1322(b)(2) to include that a cure of a default under paragraphs (3) and (5) of this subsection is not a modification of the creditor's rights for purposes of this section.

First, this Comment will provide a brief overview of chapter 13 bankruptcy and a history of the treatment of homeowners in chapter 13. It will then explore what "rights" the Supreme Court has held that § 1322(b)(2) exempts from modification. Next, this Comment will discuss how the circuits have interpreted "cure" as used in section § 1322(b)(5) and how the recent Fourth Circuit decision narrowed that interpretation. Finally, this Comment will critique the Fourth Circuit's analysis employed to interpret the statute, and apply various intrinsic and extrinsic methods of statutory...