Heir’s ability to cure mortgage arrears in a Chapter 13 bankruptcy

Author: LegalEase Solutions

QUESTION PRESENTED

Can an heir cure mortgage arrears in a Chapter 13 plan?

SHORT ANSWER

A debtor who fails to repay a mortgage faces the risk of losing his mortgaged property. Usually, repayment requires privity of contract between debtor and creditor. But courts have held that this privity of contract rule do not forbid a person who owns real property the ability to cure a default under a mortgage on that property.

RESEARCH FINDINGS

“Bankruptcy courts are essentially courts of equity for many purposes; and they sit as courts of equity in dealing with the claims of creditors and try them without the intervention of a jury.” Columbia Foundry Co. v. Lochner, 179 F.2d 630, 634 (4th Cir. 1950) (citing Pepper v. Litton, 308 U.S. 295, 303, 311 (1939)). “A mortgage is an interest in real property that secures a creditor’s right to repayment.” Johnson v. Home State Bank, 501 U.S. 78, 82 (1991). The “‘right to payment’ [means] nothing more nor less than an enforceable obligation.” Id., at 84 (quoting Pennsylvania Dept. of Public Welfare v. Davenport, 495 U.S. 552, 559 (1990)). “[A] mortgage interest that survives the discharge of a debtor’s personal liability is a ‘claim’ within the terms of § 101(5).” Id.  So, “the court must allow the claim if it is enforceable against either the debtor or his property.” Id., at 85.

Maryland Bankruptcy courts had an occasion to examine the right of an heir to proceed with Chapter 13 proceedings. In that case, involving a reverse mortgage, “the Debtor was not a party to either document and, before his mother’s death, had no direct ownership interest in Fredcrest Road” and his “bundle of rights accrue[d] solely on the basis of his status as his mother’s heir.”  Fed. Nat’l Mortg. Ass’n v. Griffin (In re Griffin), 489 B.R. 638, 639 (Bankr.D.Md.2013). The court allowed debtor’s (heir’s) “Chapter 13 plan to proceed.” Id., at 644. “[I]t is appropriate to ‘permit[ ] a Chapter 13 debtor who is the owner of real property to cure a pre-petition default under a mortgage, even if the debtor lacks privity with the mortgagee.’” Id. See In re Trapp, 260 B.R. 267, 271 (Bkrtcy.D.S.C.2001). See also, e.g., In re Garcia, 276 B.R. 627, 631–632 and n. 9 (Bkrtcy.D.Ariz.2002); In re Rutledge, 208 B.R. 624, 628 (Bkrtcy.E.D.N.Y.1997); In re Hutcherson, 186 B.R. 546(Bkrtcy.N.D.Ga.1995).

Similarly, “[p]ublic policy and equitable considerations also support this. Interpreting the term ‘claim’ broadly prevents lending institutions from manipulating bankruptcy law to thwart a debtor’s good faith attempt to reorganize a debt in bankruptcy.” In re Curinton, 300 B.R. 78, 85 (Bankr.M.D.Fla.2003).

CONCLUSION

Based on the foregoing it would appear that a debtor who is the owner of real property can cure the mortgage arrears in Chapter 13 plan.