Cure Defaults on Long-Term Debts in Chapter 13 Bankruptcy
One of the primary advantages of chapter 13 bankruptcy is the ability to cure defaults on long-term debts. Section 1325(b)(5) of the U.S. Bankruptcy Code states that a chapter 13 plan may cure default on any debt whose last payment is due after the final plan payment within a reasonable period of time and while maintaining current payments. In other words, a chapter 13 plan may provide for the curing of any defaults on long-term debts over the duration of the chapter 13 plan if current payments on the long-term debts are maintained. In practice, this provision of the bankruptcy code is used to cure defaults on long-term mortgage debts that may have led to foreclosure proceedings.
Curing Defaults under 1325(b)(5)
The ability to cure defaults on long-term debts under 1325(b)(5) does not modify the terms of the original loan, other than to extend the time for repayment of delinquent amounts. The curing of defaults on long-term debt under 1325(b)(5) merely reinstates the original terms of the long-term debt while forcing the creditor to accept regular payments on the debt as they come due plus arrearages over a reasonable period of time. Once the arrearages have been cured the long-term debt is reinstated as if there were not prior delinquency or default; in essence, the prebankruptcy debt is reinstated and deemed current.
Example: Home Mortgage Delinquencies
A common example of the ability to cure defaults on long-term debts in chapter 13 bankruptcy is evidenced in cases involving delinquent home mortgages. Some clients who hire a chapter 13 bankruptcy attorney do so to stop foreclosure proceedings brought on by delinquent home mortgage payments. In these cases, clients use the ability to cure defaults on long-term debts to save their homes from foreclosure and bring their mortgage payments current. To begin, chapter 13 clients cannot “cramdown” (ie. reduce the amount owed to fair market value) their home mortgage in chapter 13 bankruptcy as they might other debts due to section 1322(b)(2) of the bankruptcy code. However, chapter 13 clients can cure delinquent home mortgage payments over the life of their plan while maintaining current mortgage payments, thereby bringing their mortgage debt current and out of default. In the end, the client will be able to keep their home throughout the life of their chapter 13 plan and thereafter as long as all chapter 13 plan payments have been fulfilled. Hence, the ability to cure delinquent mortgage payments allows chapter 13 bankruptcy clients to save their home from foreclosure and bring their mortgage debt current.