## Facts

- Borrowers William Robert Anderson, Jr. and Danni Sue Jernigan purchased a home in Raleigh, North Carolina using seller financing from Wayne and Tina Hancock.
- The parties executed a $255,000 promissory note secured by a deed of trust on the property, requiring monthly payments of $1,368.90 at 5% interest for 30 years.
- The note provided that if a payment was more than 30 days late, the interest rate would increase to 7% “for the remaining term of the loan until paid in full,” producing a new monthly payment of $1,696.52.
- The borrowers missed the April 2013 payment; the lenders sent notice that the loan was in default and that future payments had to reflect the 7% rate.
- The borrowers made no further payments, and the lenders began foreclosure proceedings in August 2013.
- In September 2013, the borrowers filed for Chapter 13 bankruptcy, staying the foreclosure.
- The proposed Chapter 13 plan sought to cure pre-petition arrears and maintain ongoing payments, but calculated arrears and post-petition payments using the original 5% rate rather than the 7% default rate.
- The lenders objected, asserting that arrears accruing after default and all post-petition payments had to be calculated at the 7% contractual default rate.

## Issues

1. Whether a Chapter 13 plan’s “cure” under 11 U.S.C. § 1322(b) permits restoring a residential mortgage’s interest rate to its pre-default level after a contractual default-rate increase has been triggered.
2. Whether reducing the post-default interest rate constitutes an impermissible “modification” of a home-mortgage lender’s rights barred by 11 U.S.C. § 1322(b)(2).
3. Whether the default rate must apply continuously after default, including the period between the bankruptcy filing and the plan’s effective date.

## Decision

- The Fourth Circuit held that returning the interest rate to 5% as part of a Chapter 13 cure would impermissibly modify the lenders’ rights protected by § 1322(b)(2).
- The court affirmed the requirement that post-petition mortgage payments be calculated using the 7% default interest rate.
- The court reversed the district court’s application of a 5% rate for the period between the bankruptcy filing and the plan’s effective date, holding the 7% default rate governed that interval as well.
- The case was remanded for further proceedings consistent with the opinion.

## Legal Principles

- For claims secured only by the debtor’s principal residence, § 1322(b)(2) bars a Chapter 13 plan from modifying the creditor’s contractual rights.
- The “rights” protected by § 1322(b)(2) are determined by the mortgage instruments and applicable state law, and include a bargained-for default-interest clause.
- A Chapter 13 “cure” may address arrearages and permit continued performance (including de-acceleration), but it does not authorize rewriting ongoing contractual terms that took effect upon default.
- Once a contractual default interest rate is triggered and applies for the remaining term, a plan cannot partially suspend or temporally limit that rate absent a contractual or statutory basis.

## Conclusion

The Fourth Circuit ruled that Chapter 13 debtors may cure arrears on a residential mortgage but may not reduce a contractually triggered default interest rate, because changing the rate alters protected creditor rights and is a prohibited modification under § 1322(b)(2).


Anderson v. Hancock, 820 F.3d 670 (4th Cir. 2016)