Piling interest upon interest?

Here is a vexing question that stumped many bankruptcy practitioners (including law professors and judges) for a long time:

In a Chapter 13 case, where the debtor is trying to catch up on a mortgage arrearage by making monthly payments to the bankruptcy trustee, must the debtor add interest to those payments? Just think, in many cases, the arrearage itself probably consists of mostly interest and penalty fees.

The answer is no, but this is a question that once went all the way to the Supreme Court, and the Supremes actually were in favor of piling interest upon interest! Luckily for the debtors’ side, Congress amended Chapter 13 quickly after the court’s decision, a move which helps keep payments lower for those trying to save their homes with a Chapter 13 case.

 

By Doug Beaton

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