• Application of Chapter 13 Anti-Modification Provision
  • April 18, 2017 | Author: Lawrence D. Coppel
  • Law Firm: Gordon Feinblatt LLC - Baltimore Office
  • In a Chapter 13 bankruptcy case, §1322(b)(2) of the Bankruptcy Code protects a residential lender from having its under-secured deed of trust (or mortgage) modified if the lender is secured only by a deed of trust on the debtor's principal residence (and certain "incidental" property). If the lender also holds other collateral, such as a lien on personal property, then the Bankruptcy Code's anti-modification provision is inapplicable, and an under-secured deed of trust may be divided into secured and unsecured claims by the Chapter 13 debtor's plan. In a recent decision, the United States Court of Appeals for the 4th Circuit considered whether funds escrowed for insurance and taxes, insurance proceeds or miscellaneous proceeds constituted additional collateral, thus removing the protections of §1322(b)(2), or constituted "incidental" property, which entitles the lender to the anti-modification protections. The debtor's argument that escrow funds, insurance proceeds and miscellaneous proceeds constituted additional collateral under §1322 (b)(2) was dismissed by the Bankruptcy and district courts. Affirming on appeal, the 4th Circuit noted that Bankruptcy Code §101(13A)(A) defines "debtor's principal residence" to include "incidental property." Moreover, "incidental property" with respect to a debtor's principal residence is defined under §101(27B) to include "escrow funds" or "insurance proceeds." The Court further noted that under the Fannie Mae/Freddie Mac form deed of trust before it, the lender was not granted an additional lien in escrow funds, insurance proceeds or miscellaneous proceeds. Finally, the Court observed that were it to accept the debtor's position, then the anti-modification protections under §1322(b)(2) would be "eviscerated" since virtually every residential deed of trust or mortgage contains provisions that are similar to the provisions in the deed of trust that was the subject of the appeal. This case supports the common lending practice of applying escrowed funds (for taxes, insurance, etc.) to amounts owed to a lender in default situations. Please contact Lawrence Coppel with questions about this topic.