Chapter 13 Bankruptcy: Interest Paid on Mortgage Arrears

Secured and priority creditors are often provided interest on claims paid in Chapter 13 plans. In fact, in Texas some of these interest rates are set by statute. Claims for child support arrears receive 6% interest. Claims for unpaid property taxes are entitled to 12% interest. However, determining whether claims for mortgage arrears receive interest is not so simple. Section 1322 of the Bankruptcy Code states:

“…if it is proposed in a plan to cure a default, the amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.” 11 U.S.C. § 1322(e). In this situation the underlying agreements are usually the promissory note and the deed of trust. If these documents provide interest on mortgage arrears paid in bankruptcy, or some other interest-on-interest language, the claim will be paid interest in a Chapter 13 plan assuming the provision doesn’t violate some other state law.

It is up to the debtor or their attorney to object to claims for mortgage arrears accruing interest which are filed without adequate supporting documents. Trustees will object to claims that are not timely filed, or that fail to meet some other procedural requirement, but it is not their responsibility to object to issues like interest on mortgage arrears. Usually these issues get addressed at TRCC, but it may be necessary to review claims at confirmation to prevent disbursement of funds to creditors whose claims shouldn’t be paid under the terms in the proof of claim.