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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
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Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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I have a question concerning chapter 13 bankruptcy in California/

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I have a question concerning chapter 13 bankruptcy in California/ 9th Cir.

Is it accurate that a chapter 13 bankruptcy not only "de-accelerates" an accelerated note, but also, by allowing the debtor to "cure" the default, means returning the debtor to the pre-default status, and therefore "nullify" all consequences of the default, including allowing the debtor to avoid default interest, or other default penalties?

I found several cases, In re Frazer, 377 B.R. 621 Bankr (2007) that cites In re Entz-White Lumber & Supply, Inc. 850 F.2d 1338, 1340 (9th Cir. 1988) which cites and relies upon Di Pierro v. Taddeo (In re Taddeo) 685 F.2d 24, 26-27 (2d Cir. 1982) which I'm not sure is still good law.

Can you help me: 1- confirm if Entz-White is good law in CA, 2- if in CA, nullifying default penalties is permitted and 3- confirm that de-accelerating a note in ch. 13 is also permitted. Please provide any additional case law you relying on in your analysis and if you know it to be good law and not overturned. Also, if you know the reason why In re Taddeo has been red flagged, that would be helpful too. Thank you
Submitted: 1 year ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 1 year ago.
1- confirm if Entz-White is good law in CA,

A: Bankr. Code 1322(e) supersedes Entz-White Lumber, to the extent it permits a plan to cure a default at a market (as opposed to contract) rate of interest. However, Entz-White still applies where a debtor seeks to cure defaults relating to agreements predating October 23, 1994.

2- if in CA, nullifying default penalties is permitted

A: A Chapter 13 plan may provide for curing defaults “within a reasonable time” and maintaining payments while the case is pending on any debt (secured or unsecured) due after the final plan payment (i.e., long-term debts). Bankr. Code 1322(b)(5).

Section 1322(b)(5) does not modify creditor rights; it enables a debtor to reinstate original prebankruptcy agreements with creditors. This is particularly advantageous where the terms of a secured loan are favorable to the debtor (e.g., low interest rate, long maturity, etc.).

Section 1322(b)(5) applies to both secured and unsecured long-term debts. However, debtors ordinarily do not cure defaults and maintain payments on unsecured loans (other than educational loans) because (1) many debtors lack sufficient income; and (2) an obligation that is cured and reinstated under § 1322(b)(5) is nondischargeable.

3- confirm that de-accelerating a note in ch. 13 is also permitted.

The power to cure includes the power to avoid the effect of acceleration clauses calling for payment of the entire loan balance upon default in any installment. In re Taddeo (2nd Cir. 1982) 685 F2d 24, 26–27; see also In re Nelson (9th Cir. BAP 1985) 59 BR 417, 419—debtor can cure prepetition acceleration notwithstanding § 1322(b).

Also, if you know the reason why In re Taddeo has been red flagged, that would be helpful too.

A: Taddeo is still good law to the extent described above.

Hope this helps.
Customer: replied 1 year ago.

Yes, this is helpful. The only question I still have is about the nullifying of the default penalties. I don't believe the response answered the question if "curing" the default (on a mortgage in this case) entitles the debtor to nullify default penalties. For example, the note states that if the borrower "defaults" within the 1st 7 years of the loan, they are hit w/ a pre-payment penalty. The language of the case law below sounds like it is nullified, just as default "interest" would be.


 




Although “cure” is not defined in the bankruptcy code, “curing a default commonly means taking care of the triggering event and returning to pre-default conditions.” In re Frazer, 377 B.R. 621 Bankr (2007) citing In re Entz-White Lumber & Supply, Inc. 850 F.2d 1338, 1340 (9th Cir. 1988).


Di Pierro v. Taddeo (In re Taddeo) 685 F.2d 24, 26-27 (2d Cir. 1982).



Additionally, the power to “cure” the default under the bankruptcy code authorizes a plan to nullify all consequences of default, including avoidance of default penalties, such as, (but not limited to), a higher interest rate. See In re Entz-White 850 F.2d at 1339. Di Pierro v. Taddeo (In re Taddeo) 685 F.2d at 24 (2d Cir. 1982)


 

Expert:  socrateaser replied 1 year ago.
Rather than attack this abstractly, please tell me what it is exactly that you're trying to do, and I'll see if I can find some applicable law.

Thanks in advance.
Customer: replied 1 year ago.

Trying to object to a proof of claim in a ch. 13 bankruptcy where a mortgage deed of trust has attempted to accelerate the note, by claiming the full amount of the loan balance is required to cure. Also trying to object to default interest, default penalties that the case law appears to allow a debtor to nullify as part of the right to "cure" the default.

Expert:  socrateaser replied 1 year ago.
A plan may propose cure and reinstatement of a loan that the lender contractually accelerated before the case was filed. See Matter of Metz (9th Cir. 1987) 820 F2d 1495, 1497 (Chapter 13 authorizes debtor to cure prepetition acceleration of home mortgage debt triggered by default); In re Nelson (9th Cir. BAP 1985) 59 BR 417, 419–420 (acceleration may be cured by paying arrearages and maintaining current payments).

Upon successful completion of a Chapter 13 plan providing for cure of a default and maintenance of payments pursuant to § 1322(b)(5), the secured debt is reinstated as if there had been no prior default [emphasis added] and the effect of any prepetition judgment is extinguished. See In re Rorie (BC ED PA 1989) 98 BR 215, 218.

Ergo, all penalties are extinguished.

Hope this helps.
socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 34170
Experience: Attorney and Real Estate Broker -- Retired (mostly)
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