Do Mortgage Arrears Get Paid Interest in Chapter 13 Bankruptcy?


By Jan Hamilton, Standing Chapter 13 Trustee

Frequently, arrearages on real estate mortgages are paid through the plan. Do they bear interest or not? If they do, at what rate?

While Judge Somers has (essentially on behalf of all of the judges in Kansas), ruled on certain language in plans relating to mortgages, (In re Seal, Case No 05-17262, order entered March 6, 2007), the decision leaves open the question of whether interest is to be paid and at what rate.

Section 1322(e) was enacted as part of the Bankruptcy Reform Act of 1994 to overrule the Supreme Court decision in Rake v. Wade, 508 U.S. 464, (1993).

In that case, the Court had required debtors curing home mortgage defaults to pay not only the interest on the principal of their loans, but also interest on that interest, as well as interest on other elements of the arrearage, such as interest, late fees, escrow payments and attorney’s fees. Section 1322(e) provides that the amount necessary to cure a default is to be determined
in accordance with the underlying agreement and applicable nonbankruptcy law.

The legislative history of this section states the intent to overrule Rake, which had required interest payments even when applicable law prohibited them and the parties to the original transaction did not contemplate them. The House Report describes such payments as a “windfall to secured creditors,” which often came at the expense of the unsecured creditors.

Under section 1322(e) the amount necessary to cure a default is the same amount as would be required to cure if the debtor were not in bankruptcy. Two conditions must be met before interest or other charges can be required as part of a bankruptcy cure. First, the interest or charges must be required under the original agreement, and second, state law cannot prohibit them. In other words, the bankruptcy court will never require interest in excess of that permitted by state law, and will require none unless the agreement provides for interest.

Rake v. Wade had relied on Code section 506 to require preconfirmation interest from an
over secured creditor and section 1325 (a)(5) to require postconfirmation interest. By its
introductory language specifically mentioning those sections, as well as section 1322(b)(2), section 1322(e) makes clear that these sections have no applicability in a cure situation, in which the debtor is merely keeping the original contract in place and bringing it up to date.
However, under section 702(b)(2)(D) of the Bankruptcy Reform Act of 1994, section 1322(e) is applicable only to agreements entered into after October 22, 1994. While the legislative history clarifies that the new provision is applicable to refinancing agreements entered into after that date, its inapplicability to earlier agreements means that many debtors will continue to have to pay extra interest to cure their mortgages for years after the enactment of section 1322(e).

It is our position that BAPCPA did not change the history of the Rake v. Wade type issue.

To sum this all up you need to read the loan documents and determine if the loan
document calls for `interest on interest” if it does not, then the plan need not provide
interest for arrearages. If interest is called for, then the proper rate is likely the contract
rate and not the current discount rate.

About Jill Michaux

Jill Michaux is a Kansas bankruptcy attorney. She can be found on Google+. She and her partner, Mark Neis, are Topeka's only board certified consumer bankruptcy law specialists.