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The length of the plan is affected by the debtor’s income and family
size, as well as whether or not unsecured claims will be paid in full. See 11 U.S.C. §§ 1322(d), 1325(b)(1),
(b)(4).
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$328, which covered not only the mortgage arrears, but also tax arrears, the trustee payment,16
attorney fees and a 100% repayment of all debts owed to unsecured creditors.17 Two years later
this family is faring well in bankruptcy. They appear to be current on their ongoing payments to
their mortgage creditor and their bankruptcy repayment plan remains pending.
As the above example demonstrates, bankruptcy can be a powerful tool for fighting
foreclosure because it can improve a family’s chances for catching up on past, missed mortgage
payments. However, the ability of homeowners to cure mortgage defaults in bankruptcy is
significantly undermined when their monthly mortgage payments before bankruptcy are severely
unaffordable. Debtors who have suffered a permanent decline in income before bankruptcy are
less likely to be able to take advantage of their right under bankruptcy law to repay their debts
through a chapter 13 repayment plan Similarly, debtors suffering from payment shock as a result
of teaser rates on adjustable-rate mortgages,18 or those who have been saddled with unaffordable
loans from the moment of loan origination19 will find it more difficult to save their homes under
the current bankruptcy laws.
Homeowners with mortgage payments that overwhelm their incomes face much greater
challenges in saving their homes in bankruptcy. The right to cure a mortgage default under §
1322(b)(5) of the Bankruptcy Code does not itself permit a homeowner to modify terms of a
mortgage loan. Section 1322(b)(2) sets forth the general rules regarding modification of claims in
bankruptcy, permitting debtors to modify the rights of secured and unsecured creditors. Some of
the ways that secured claims may be modified include altering the payment schedule, reducing
16 The chapter 13 trustee collects payments made by chapter 13 debtors and disburses those payments
to creditors in accordance with the debtor’s confirmed chapter 13 plan. See First Bank and Trust v. Gross
(In re Reid), 179 B.R. 504, 507 (E.D. Tex. 1995). The chapter 13 trustee is generally paid a commission or
fee for administering these payments. See 9 AM. JUR. 2D BANKRUPTCY § 588 (2006). The fee is typically 4–
10% of the amount being paid through the plan. Id.
17 The trustee will pay a dividend to unsecured creditors in accordance with the debtor’s chapter 13
plan. See In re Phelps, 149 B.R. 534, 535 (Bankr. N.D. Ill. 1993) (noting trustee payment of dividends to
unsecured creditors). In chapter 13, debtors may modify claims of unsecured creditors by paying them less
than the full value of their claim. See 11 U.S.C. § 1322(b)(2). Unsecured creditors may receive a dividend
of 0 to 100% on their claims. See Branigan v. Bateman (In re Bateman), 515 F.3d 272, 280 (4th Cir. 2008)
(stating varying range of dividend percentages). A dividend of 100% means the unsecured creditors will be
paid in full, a dividend of 50% means the unsecured creditors will be paid fifty cents on the dollar and a 0%
dividend will produce no return to the unsecured creditors. After unsecured creditors are paid the dividend
specified in the debtor’s chapter 13 plan, any remaining debt is discharged upon completion of the plan. See
11 U.S.C. § 1328.
18 See generally MAJORITY STAFF OF THE JOINT ECON. COMM., THE SUBPRIME LENDING CRISIS: THE
ECONOMIC IMPACT ON WEALTH, PROPERTY VALUES AND TAX REVENUES, AND HOW WE GOT HERE 6, 20
(2007), available at http://jec.senate.gov/archive/Documents/Reports/10.25.07OctoberSubprimeReport.pdf
(identifying the root of the subprime mortgage crisis as the prevalence of 2/28 and 3/27 teaser loans).
19 See generally STATE FORECLOSURE PREVENTION WORKING GROUP, DATA REP. NO. 1, ANALYSIS OF
SUBPRIME MORTGAGE SERVICING PERFORMANCE 10 (2008) (stating that more than 30% of subprime and
Alt-A ARMs are already at least thirty days past due before any rate reset). Over the past several years,
many borrowers were unwittingly pushed into unaffordable loans by unscrupulous mortgage brokers or
lenders. See, e.g., Mortgage Market Turmoil, Causes and Consequences: Hearing Before the S. Comm. on
Banking, Housing, and Urban Affairs, 110th Cong. (2007) (statement of Alan M. White, Community Legal
Services, Inc., on behalf of Jennie Haliburton), available at
http://banking.senate.gov/public/_files/haliburton.pdf (describing elderly homeowner whose monthly
payment for principal, interest, taxes and insurance consumed 62% of her social security payment and left
her with only $664 a month for all other expenses such as food, medicine, and utilities).
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the contract interest rate,20 or “stripping down” the amount of the claim to the value of the
collateral.21 However, the rule permitting the modification of secured claims is limited by
additional language in the same section that creates an exception for certain mortgage loans. The
exception prohibits the modification of “a claim secured only by a Hormone Therapy in real
property that is the debtor’s principal residence.”22 This exception is commonly known as the
“anti-modification” rule. This language means that bankruptcy debtors cannot change or adjust
the terms of their home mortgages. This restriction on loan modification can make it nearly
impossible for debtors with unaffordable mortgage payments to save their homes from
foreclosure through the bankruptcy process.
Because families remain obligated to make their future mortgage payments according to the
original loan terms, those who have severely unaffordable mortgage loans may be more likely to
fail in chapter 13 bankruptcy. Sometimes, the high housing costs began at the time of loan
origination. For example, a debtor from the Mortgage Study was saddled with a monthly
mortgage payment of $2465, which was nearly equal to her monthly gross income of $2699.23
The debtor’s mortgage loan was a six-year fixed-rate loan with an interest rate of 11%. The loan
was an “interest only” obligation with a $271,465 balloons payment due at the end of the six-year
term. The debtor’s bankruptcy court records listed an additional monthly contribution from a
family member of $1322. However, even with these additional funds the monthly mortgage
payment consumed 62% of household income without taking into consideration real estate taxes,
insurance and utilities. Unable to make the monthly mortgage payments going forward, the
automatic stay preventing foreclosure on the home was lifted by the court within just a few
months of the bankruptcy filing. Despite seeking relief in bankruptcy, this debtor lost her home to
foreclosure.24
Similarly, debtors suffering from payment shock on adjustable-rate mortgages may also be
unable to use bankruptcy to save their homes. The so-called explo
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