Differing Interest Rates for Cure and Maintain

Posted by NCBRC - April 21, 2015

The terms of the underlying lending agreement dictated the interest rate applicable to the debtors’ cure and maintain provision in their chapter 13 plan. In re Anderson, No. 14-690 (E.D. N.C. April 6, 2015).

The Andersons purchased residential property from the Hancocks, financed in the amount of $255,000 by the sellers. The Andersons signed a thirty year note agreeing to pay $1,368.90 per month including interest payments at 5%. In the event of a default, the note provided that the interest rate would increase to 7%. In the alternative, the note entitled the Hancocks to accelerate the loan. When the Andersons defaulted on the loan, the Hancocks imposed the default interest rate, notified the Andersons of acceleration of the loan, then instituted foreclosure. The debtors filed chapter 13 bankruptcy proposing to cure the arrears and maintain payments at the 5% interest rate through the life of the plan. The Hancocks objected to the plan on two bases. First, they argued that the calculation of arrears was too low because it was based on the pre-default interest rate. Second, they maintained that all future payments on the loan should be at the 7% interest rate.

The bankruptcy court held that permitting the debtors to maintain the loan at the 5% interest rate would constitute a “modification” prohibited by section 1322(b)(2). The court approved the proposed plan as modified to apply the 7% interest rate to both the arrears and the payments necessary to maintain.

On appeal, the district court distinguished between “curing” and “maintaining.” Addressing the debtors’ argument that cure permits them to return the loan to its pre-default condition (including the pre-default interest rate) and maintain on that basis, the court found that this misconstrued the statute. Contrary to the Andersons’ position, the right to “cure” does not eliminate the contractual consequences of the default. Once a default is cured, the lending agreement, as interpreted in accordance with state law, dictates the terms of maintenance of the loan. In this case, the promissory note gave the lenders the right either to accelerate the loan or apply the default interest rate.

The district court found that under this reasoning, for the months in which the lenders had accelerated the loan, they were not entitled to the default interest rate. Once the loan was decelerated in bankruptcy, the bargained-for terms of the note applied to impose the 7% interest rate. The court, therefore, affirmed the bankruptcy court’s decision except to the extent that the bankruptcy court applied the default interest rate to the arrears accumulated while the loan was accelerated.

Anderson ED NC opinion



Post a Comment

You must be logged in to post a comment.