It is foreseeable that chapter 13 creditors will need to work with debtors and trustees to memorialize and seek court approval for a large volume of payment deferments and that they will need to do so on an expedited basis.The Act specifically provides that 11 U.S.C. §§ 1322(b) and 1322(c) apply to any modifications pursuant to the § 1329(d)(1). Under § 1322(b)(2), a plan may not modify the rights of holders of claims secured only by real property that is the debtor’s principal residence.

A recent New Jersey Bankruptcy Court decision issued by The Honorable Raymond T. Lyons, In re Robinson, Jr., Case No. 11-26981 (March 2, 2012) concluded that in certain circumstances, condominium liens secured under N.J.S.A. 46:8B-21(b), cannot be stripped off or crammed down through a debtor’s Chapter 13 plan of reorganization in bankruptcy. This holding is significant to condominium associations because generally, under Bankruptcy Code 11 U.S.C. §1322(b)(2), a debtor may strip off (remove) or cramdown (reduce the amount) junior liens that are not secured by equity in the debtor’s principal residence. Under this section of the Bankruptcy Code, a debtor has the ability to remove or reduce a properly recorded junior lien from being secured by their principal residence and reclassify the lien as wholly or partially unsecured.However, this same section of the Bankruptcy Code limits a debtor’s plan of reorganization from modifying the rights of holders of secured claims secured by the debtor’s principal residence.

Pursuant to 11 U.S.C. § 1322(b)(2), a Chapter 13 bankruptcy plan cannot modify the rights of a secured creditor whose claim is only secured by an “interest in real property that is the debtor’s principal residence.”On December 6, the Eleventh Circuit held that this provision prevents the discharge of a mortgage in a Chapter 13 bankruptcy, regardless of whether the plan “provided for” the mortgage or whether the mortgagee filed a proof of claim.

The Defendants objected, stating that the payments should continue to reflect the seven percent interest rate. The bankruptcy court agreed with defendants, and found that the use of the five percent interest rate ran afoul of 11 U.S.C. § 1322(b)(2), which prevents plans from modifying the rights of creditors whose interests are secured by debtors’ principal residences.The plaintiffs appealed to the district court, arguing their bankruptcy plan should be allowed to “cure” the increased default rate of interest.

Black objected.The Bankruptcy Court held that the proposed plan modified Black’s rights and violated 11 U.S.C. § 1322 under Witt. Hurlburt v. Black (In re Hurlburt), 572 B.R. 160, 169 (Bankr. E.D.N.C. 2017). The District Court affirmed, Hurlburt v. Black (In re Hurlburt), No. 7:17-cv-169-FL (E.D.N.C. Dec. 19, 2017), as did a panel of the Fourth Circuit.

The Fourth Circuit has held that in a case where the rate of interest on a residential mortgage loan had been increased upon default, a Chapter 13 Plan proposing to “cure” default under 11 U.S.C. §1322(b) is an impermissible modification barred by §1322(b)(2). In the case of Anderson v. Hancock, No. 15-1505 (Bankr. EDNC April 27, 2016), the lenders, two individuals who had financed the purchase of a residence by the Debtors, had exercised their remedy under the Note to increase the interest rate from 5.

I was recently engaged in a Chapter 13 case after the debtor’s bankruptcy plan had already been confirmed (the case shall go unnamed).After reviewing the plan, I quickly learned that the debtor had secured a good deal for himself to cure the pre-bankruptcy arrearage–monthly arrearage payments of less than $200.00 for the plan’s duration, with one (1) balloon payment of around $20,000 at the end of the plan to repay the remaining arrearage.Note that the issue of pre-petition arrearage balloon payments does not implicate the Chapter 13 anti-modification prohibition for debts secured by the debtor’s primary residence as set forth in 11 U.S.C. § 1322(b)(2) (“the plan may modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence”).A chapter 13 plan may propose to cure the pre-petition arrearage for a claim secured by the debtor’s primary residencebut cannot modify or restructure that debt without the creditor’s consent.

(Priority of claims is important in the Chapter 13 context because a Chapter 13 plan cannot be confirmed unless all priority claims are paid in full thereunder, or the holder thereof consents to a different treatment. 11 U.S.C. § 1322(a)(2).) The starting point of both decisions was the so-called “functional analysis” mandated by the Supreme Court in United States v. Reorganized CF & I Fabricators of Utah, Inc., 518 U.S. 213, 224 (1996), whereby courts examining the question of whether a claim is entitled to “tax” priority must look past the label of the exaction giving rise to the claim (whether “tax” or otherwise) to the exaction’s underlying characteristics and function.

For example, the Debtor can’t cram down the value of a claim secured only by a security interest in the Debtor’s principal residence. See 11 U.S.C. section 1322(b)(2). Similarly, the Debtor cannot cram down a purchase money security interest in a personal use motor vehicle acquired within 910 days of the bankruptcy filing date.

In both Chapter 13 consumer bankruptcy cases and individual Chapter 11 cases, a debtor is prohibited from modifying a claim that is “secured only by a security interest in real property that is the debtor’s principal residence.” 11 U.S.C. §§1322(b)(2), 1123(b)(5). In the typical case, when property does not qualify for protection under this so-called “anti-modification” provision, the debtor will seek to strip down the lien of the secured creditor to the value of its collateral, and deal only with that portion of the debt as a “secured claim” under the reorganization plan.