Chapter 13 Debtors Need
Not Pay Late-Filed Mortgage
Arrearage Claims
By Robert V. Schaller
Schaller Law Firm, P.C, Oak Brook, Illinois
N
early every NACBA attorney
has had prospective clients
walk in the office seeking
bankruptcy help to save their home
from foreclosure. In the “good old
days” before the Great Recession
and before the current loan
modification craze, debtors would
come to the office with relatively
small mortgage arrearage claims
compared to today. The arrearages
in my office were small (between
$15,000-$30,000)
because
mortgage lenders typically started
and completed the foreclosure
process in judicial states over a few
months and there was insufficient
time for the arrearage to increase
dramatically
($80,000$120,000).
Bankruptcy was a first resort for
many homeowners because of
the automatic stay protections and
the ability to cure the mortgage
arrearage over a 60-month period.
Bankruptcy now appears to be the
last resort for many homeowners
struggling with foreclosure. Worse,
a mortgage arrearage balance can
grow massively because the delay
in the foreclosure process in judicial
states has stretched from months
to years. The delay emanates from
20
CONSUMER BANKRUPTCY JOURNAL
due process challenges, standing
and notice issues, court-mandated
mediation
requirements,
loan
modification efforts, and the advent
of the foreclosure defense bar
whose singular goal appears to be
delaying the foreclosure sale.
a. Stripping Secured Mortgages
Consequently, NACBA attorneys
had to be creative and develop new
strategies to help homeowners save
their underwater homes and prevent
foreclosure despite huge mortgage
arrearages.
Attorneys
started
targeting wholly-unsecured second
and third mortgages when the fair
market value of the residential real
estate securing these mortgages
was insufficient to cover the senior
mortgage obligations. Eight circuit
courts have held that a debtor
may strip-off a wholly-unsecured
junior lien secured by a chapter 13
debtor’s primary residence.1
Plus, strip-downs became a popular
tool to reduce a mortgage obligation
from the contractual amount owed to
an amount equal to the value of the
real estate securing the loan. Stripdowns of mortgages secured by
non-residential real property were
Winter 2015
easy.2 Strip-downs of mortgages
not secured “only” by residential
property proved successful.3 Also,
victories were had stripping-down
mortgages secured by residential
property in cases “in which the last
payment on the original payment
schedule for a claim …is due before
the date on which the final payment
under the plan was due.”4
b.
Objecting
to
Arrearage Claims
Mortgage
Sometimes a chapter 13 homeowner
facing foreclosure cannot afford to
cure the mortgage arrearage on
a senior mortgage lien, even after
a junior mortgage strip-off. Until
recently, these homeowners had no
other chapter 13 option other than to
propose a plan that (a) surrenders
the property to the senior lienholder
pursuant to §1325(a)(5)(C);5 or
(b) restructures the debt with the
acceptance of the senior lienholder
pursuant to §1325(a)(5)(A).6 Sadly,
NACBA members know how hard it
is to deal with recalcitrant mortgage
lenders.7
Now the U.S. Court of Appeals
for the Seventh Circuit has given
homeowners a third option: striking
National Association of Consumer Bankruptcy Attorneys