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In re Wines

239 B.R. 703 (D. N.J. 1999)

MORTGAGES; BANKRUPTCY—The effect of a Chapter 13 bankruptcy is to split a mortgage into two portions, a pre-petition debt and a post-petition debt; pay-off statements are to be calculated on that basis.

A borrower defaulted on its residential mortgage loan and during the course of foreclosure proceedings, filed for bankruptcy under Chapter 13. The Court determined the amount of the arrearage and the debtor entered into a plan which provided for sixty monthly payments calculated to pay the arrearage with interest. The debtor then made those monthly payments (inside the plan) together with monthly payments toward the remaining principal balance (outside the plan). After seventeen or eighteen payments, the debtor sought to sell the property and asked for a “pay off” figure from the lender. That figure was provided, but the debtor disagreed with the amount. Consequently, the Bankruptcy Court allowed the property to be sold and payment of the undisputed portion was made to the lender. The balance of the sale price was placed in escrow pending determination of the amount actually owed to the lender. Both the lender and the debtor submitted their “pay off” figures to the court together with the basis upon which those figures had been calculated. The Court rejected both figures and did its own calculations.

The parties cited no cases dealing with the proper application of payments to a secured creditor for arrears inside a plan and outside a plan. The Court noted that the United States Supreme Court “has made clear that the arrears and the payments outside the plan must be treated separately.” A treatise was cited by the Court to the effect that “[t]he effect of Chapter 13 is to split the mortgage into two separate debts: a pre-petition debt and a post-petition debt. The pre-petition debt consists of those payments, advances, fees, and charges that came due prior to the filing of the bankruptcy petition; the post-petition debt is treated like a current mortgage and consists of those payments which come due after the bankruptcy petition is filed.” Consequently, the Court separated the debt at the time of the bankruptcy into two portions: the accrued delinquency; and the balance remaining (assuming that all prior payments had been made even though they had not been) made. It then prepared two separate amortization tables, one for the pre-petition arrearages, and one for the theoretical balance of the loan at the time of bankruptcy, treating the pre-petition arrearages as having been paid (even though, in fact, they had not been paid). The Court then applied the payments inside the plan against the accrued pre-petition charges and applied the payments outside the plan against the theoretical remaining balance on the date of the bankruptcy.


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