Many mortgage promissory notes across the country and here in Florida account for a higher rate of interest if the borrower defaults on the loan. If a homeowner files for Chapter 13 bankruptcy, any debt repayment plan will most likely include mortgage payments at the default rate of interest since it is impermissible to modify a lender’s rights without its consent. One couple learned this the hard way after the U.S. Court of Appeals for the 4th Circuit agreed with the rulings of the district court and the bankruptcy court on the matter.
The couple borrowed approximately $255,000 to purchase a home. Ultimately, they defaulted on the mortgage loan when they were unable to make payments. The lender then instituted the default rate of interest, set at 7 percent, and initiated foreclosure proceedings. The homeowners then filed for Chapter 13 bankruptcy protection, which was their right.
In their proposed repayment plan, the couple agreed to make mortgage payments at the original interest rate of 5 percent instead of the default interest rate. The lender objected, and the bankruptcy court ruled with the lender that the post-petition payments should be made at the default interest rate. The couple appealed, and the result of that appeal was that the bankruptcy court’s ruling was upheld. The couple appealed again, and the appeals court upheld the rulings of the lower courts saying that all of the payments, both those in arrears and post-petition should be at the default interest rate.
Even though filing for Chapter 13 bankruptcy provides substantial protections to Florida residents, the court cannot ignore the rights of creditors. Arbitrarily making modifications to the terms of the original loan are not permitted except under certain circumstances. Therefore, any debt repayment plan must reflect the rights provided to the lender in an original promissory note.
Source: Bloomberg BNA, “Ch. 13 Debtors Must Pay Mortgage at Default Interest Rate”, May 4, 2016