LEXOLOGY-

The Bankruptcy Code prohibits a chapter 13 debtor from modifying a mortgage lien on the debtor’s principal residence. Even in situations in which a secured creditor fails to file a proof of claim or otherwise participate in the bankruptcy proceeding, the Bankruptcy Code allows a secured creditor’s lien on a primary residence to pass through the bankruptcy unaffected. However, a recent decision from a bankruptcy court in Texas illustrates the risks to secured creditors of blind reliance on these statutory protections.

In the chapter 13 case, the debtors filed a proof of claim on behalf of the secured creditor that provided a different interest rate than the contract rate on their homestead mortgage. The debtors’ chapter 13 plan also proposed payment at the reduced interest rate. The secured creditor never filed its own proof of claim and did not object to the chapter 13 plan, which was confirmed. After the debtors made all payments required by the plan, the bankruptcy court held that the mortgage had been paid in full and ordered that the lien be released upon entry of the discharge, concluding that the secured creditor received adequate notice of the chapter 13 plan and failed to object. To potentially avoid this result, secured creditors should carefully examine the contents of any proofs of claim filed on their behalf as well as the terms of chapter 13 plans to ensure the treatment set forth in those filings is consistent with the creditor’s expectations. If a creditor disputes the treatment proposed by a proof of claim or plan, the creditor should carefully consider its potential responses, including objecting to the proof of claim filed on its behalf, filing an objection to the proposed plan or appealing an order confirming that plan.

[LEXOLOGY]

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