Michal Zabadal


Residential Mortgage Loans, Bankruptcy Code, Creditor, Debtor


For many decades, healthy levels of residential mortgage loans (“RMLs”) and their regulation have been among the major drivers of the economy. Because of the importance of RMLs for the condition of the national financial system and the general well-being of the society, it is essential that lenders are reasonably incentivized to originate these loans. A well-designed promise of higher recovery on RMLs in times of distress can be a compelling motivator. The Bankruptcy Code seeks to deliver on that promise by treating RMLs more favorably. It does that by barring the debtor-in-bankruptcy from modifying a claim secured by a mortgage on real property that represents the principal residence of the debtor.

The modification of a general secured claim may come in many flavors. Most potently, it can take the form of bifurcation of an under-secured claim into two portions: one, equal to the value of the property securing it; and second, for the remainder of the original claim. It is the second portion that will, following such bifurcation, be treated as an unsecured claim. As a result, the recovery on the unsecured portion will commonly be only cents on the dollar. Creditors whose RMLs are secured by the principal residence of the debtor enjoy protection from bifurcation, and, consequently, achieve higher recovery on their claims.

At first glance, the condition for the application of the anti-modification protection is straightforward—the claim must be secured only by real property that is the principal residence of the debtor. Unfortunately, many complexities have arisen out of attempts to determine what constitutes one’s principal residence in this context. Is any real property where the debtor principally resides the debtor’s principal residence, even though the debtor simultaneously runs a business on the property or rents a portion of the property to a third party? Alternatively, does the debtor have to use the property exclusively as her principal residence for the claim to qualify for the anti-modification protection? Viewed from yet another perspective, does it matter whether the parties to a particular mortgage transaction intended to provide the debtor with a home or a source of income? As different courts embraced the question of what constitutes the debtor’s principal residence differently, three distinct interpretive approaches arose.

This Note begins with a survey of the relevant interpretive approaches. It then advocates for the adoption of an approach that, in the author’s opinion, best enables the Bankruptcy Code to deliver on its promise and to achieve the ultimate purpose of the anti-modification protection—encouraging the flow of capital into the RML market.



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