Chapter 13 plan can propose early payoff of mortgage loan

J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
Posted on Jul 07, 2015

A Katy Texas couple borrowed $28,600 in 2005 on a home equity loan against their home. The home equity loan provided for interest only payments at 9.9% from 2006 through Nov. 30, 2015, followed by principal and interest payments from December 2015 until the balance of the loan was due in 2030. The interest rate was adjustable and changed each month based upon an index plus 2.5%.

They filed chapter 13 in 2015, and proposed to lower the interest rate to a fixed interest rate of 5.75%, and pay off the full balance of the loan within their 5 year chapter 13 plan, prior to the maturity date. Bank of America (BOA) the current mortgage servicer, objected, arguing that both of these proposed changes violated Section. 1322(b)(2) of the Bankruptcy Code, which states: (T)he plan may -(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence..

The court ruled that the interest rate change was a violation of 1322(b)(2), and could not be allowed. But because the note provided that the debtors could prepay the note at any time without penalty, the plan could provide for full payment of the mortgage within the term of the plan. In re Gaetje, Case No. 15-30130, U.S. Bankruptcy Court for the Southern District of Texas, Houston Division.

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