Bradley and Kelly Koetters could not file Chapter 13. Their student loans topped $630,000, far past the Chapter 13 unsecured debt ceiling. So when they fell about $13,000 behind on a $125,000 home mortgage, they filed an individual Subchapter V case and proposed to pay the arrears over five years while leaving the loan otherwise untouched. The lender said Chapter 11 does not allow that. On May 29, 2026, Chief Judge Peter W. Henderson disagreed in In re Koetters, No. 25-80895 (Bankr. C.D. Ill. May 29, 2026).
The ruling matters in New Mexico because the lender’s main authority was In re Jacobs, 644 B.R. 883 (Bankr. D.N.M. 2022), an Albuquerque bankruptcy court decision that reached the opposite result. A Santa Fe or Las Cruces homeowner who needs Subchapter V to save a house faces local precedent that cuts against a deferred cure.
Why do New Mexico homeowners end up in Subchapter V instead of Chapter 13?
Chapter 13 is the usual tool for curing a mortgage default over time, but it has debt caps. Under 11 U.S.C. § 109(e), as adjusted effective April 1, 2025, an individual qualifies only with noncontingent, liquidated unsecured debts under $526,700 and secured debts under $1,580,125.
Subchapter V of Chapter 11 picks up many of those people. An individual engaged in business activity with aggregate noncontingent liquidated debts under the current cap of $3,424,000, at least half of it from business, can elect it. Legislation to raise that ceiling to $7.5 million has moved through the Senate, so confirm the figure in force on the filing date.
What did the court decide in Koetters?
The plan treated the lender, NewRez LLC, as impaired, paid the $13,000 arrearage within five years without interest, and changed no other term. NewRez objected that Chapter 11 permits a cure only if arrears are paid in full by the effective date. The court overruled the objection.
The holding rests on 11 U.S.C. § 1123(a)(5)(G), which requires a plan to provide adequate means for its implementation, including “curing or waiving of any default.” Unlike most cure provisions in the Code, it states no deadline. Reading it alongside the Chapter 13 cure power in § 1322(b)(3) and (b)(5), Judge Henderson held that an individual debtor may impair an objecting home lender by curing the default “on or before the time the debtor receives a discharge.” In a Subchapter V cramdown, discharge under § 1192 comes only after the payments due in the first three to five years of the plan, so that is the outer deadline.
The court also noted § 1190(3), which lets a Subchapter V plan modify a home mortgage when the loan proceeds went primarily into the debtor’s business. The Koetters loan was ordinary purchase money, so it played no role.
Doesn’t the anti-modification rule block a mortgage cure in Chapter 11?
Section 1123(b)(5) lets a plan modify secured claims “other than a claim secured only by a security interest in real property that is the debtor’s principal residence,” and Nobelman v. American Savings Bank, 508 U.S. 324 (1993), reads the protected “rights” as the contractual terms of the note and mortgage. A cure is different: paying what is past due restores the original bargain. The Tenth Circuit drew that line in Wade v. Hannon, 968 F.2d 1036 (10th Cir. 1992), which Koetters cites for the point that Congress barred changes to the future payment stream, not restoration of it. Section 1123(d) then fixes the cure amount by the loan documents and nonbankruptcy law, not § 506(b).
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Why does In re Jacobs make this harder in Albuquerque?
In In re Jacobs, No. 19-12591-j11 (Bankr. D.N.M. Oct. 14, 2022), Judge Jacobvitz held that a Chapter 11 plan violates § 1123(b)(5) unless all preconfirmation home mortgage arrears are paid by the effective date, reasoning from § 1124(2), which lets a debtor leave a lender unimpaired by curing and reinstating. The debtor could not fund an immediate cure, and the case was dismissed.
Koetters answered Jacobs head on. Section 1124(2) decides whether a creditor is impaired and gets a vote; it is not the only source of cure authority. A debtor who can cure at confirmation may treat the lender as unimpaired and seek a consensual plan with a prompt discharge. One who cannot may treat the lender as impaired, accept a cramdown under § 1191(b), and stay in bankruptcy until the arrears are paid. Jacobs never mentioned § 1123(a)(5)(G), which is why Judge Henderson found it unpersuasive.
Neither opinion binds the District of New Mexico, and the Tenth Circuit has not spoken, so build a plan that survives either reading.
How would this play out for a Las Cruces dentist couple?
Two dentists own a Las Cruces practice and a Mesilla Valley home worth $520,000. They owe $410,000 on the mortgage and are $48,000 behind after a partner dispute cut collections. Their student loans total $700,000, and the practice LLC they both guaranteed owes $220,000. The lender filed a judicial foreclosure in Doña Ana County District Court in July 2026.
Chapter 13 is out because the student loans alone exceed the $526,700 unsecured cap. Total debt of about $1.33 million sits under the Subchapter V cap, but § 1182(1)(A) also requires that at least half of the debt arose from commercial or business activities, and $220,000 of practice debt is about 17 percent of the total. The couple qualifies only if the dental school loans count as business debt, an argument a court can reject. If Subchapter V is closed, the fallback is a traditional individual Chapter 11, where the same § 1123(a)(5)(G) reasoning applies but Jacobs is the local precedent and discharge under § 1141(d)(5) waits until all plan payments are complete. Their $110,000 of equity fits inside the $150,000 per-person homestead exemption in NMSA 1978 § 42-10-9, so the house adds nothing to the § 1129(a)(7) liquidation test.
The plan keeps the regular $2,600 monthly payment flowing and cures the $48,000 at $1,000 per month over 48 months, with interest on the arrears governed by the note under § 1123(d). Under Koetters that works; under Jacobs the court could demand the $48,000 at the effective date. The practical answer is to file before the foreclosure judgment, because NMSA 1978 § 39-5-18 leaves only a nine-month redemption window after a judicial sale (often cut to one month by the mortgage itself), and to line up a family loan that could fund an effective-date cure if the court follows Jacobs.
What does an attorney-CPA see in the numbers?
The servicer’s arrearage figure is rarely the cure amount. It usually bundles escrow shortages, force-placed insurance, and default interest, and § 1123(d) lets the debtor contest any charge the note or state law does not allow. Only the interest component of a cure payment is deductible. Subchapter V commits projected disposable income for three to five years, and with New Mexico income tax topping out at 5.9 percent, that budget is built on after-tax dollars.
| Path | Who qualifies | When arrears must be paid | Discharge timing |
|---|---|---|---|
| Chapter 13 | Unsecured under $526,700, secured under $1,580,125 | Over the plan, up to 5 years | After plan completion |
| Subchapter V, consensual | Business debtor under $3,424,000 | At the effective date (lender unimpaired) | At confirmation |
| Subchapter V, cramdown (Koetters) | Same | Before discharge, up to 3 to 5 years | After plan payments complete |
| Traditional Chapter 11 (Jacobs view) | Any individual | In full by the effective date | After plan completion |
| Loss mitigation outside bankruptcy | Depends on the servicer | Capitalized or deferred by agreement | Not applicable |
What should a New Mexico debtor do before the foreclosure judgment is entered?
Pull the loan documents and payment history and reconcile the default amount. Recheck the § 109(e) math, because a Chapter 13 cure sidesteps Jacobs entirely. If Subchapter V is the only option, document the business-activity nexus, prepare the projections § 1190 requires, and check whether any home loan proceeds funded the business, which would open the § 1190(3) door. Then file before judgment, so the automatic stay under § 362 stops the sale.
Frequently Asked Questions
Can I cure a mortgage default in Subchapter V if I don't qualify for Chapter 13?
According to In re Koetters, No. 25-80895 (Bankr. C.D. Ill. May 29, 2026), yes: an individual Subchapter V debtor may pay home mortgage arrears through deferred plan payments under 11 U.S.C. § 1123(a)(5)(G) as long as the cure is complete before discharge. The Albuquerque bankruptcy court reached the opposite conclusion in In re Jacobs in 2022, so New Mexico debtors should plan for both outcomes.
What are the Chapter 13 debt limits in 2026?
For cases filed on or after April 1, 2025, 11 U.S.C. § 109(e) requires noncontingent, liquidated unsecured debts under $526,700 and secured debts under $1,580,125. Student loans count as unsecured debt for this test.
Does the New Mexico homestead exemption protect my house in a Subchapter V case?
NMSA 1978 § 42-10-9 exempts $150,000 of equity per person in a primary residence, so a married couple who both own the home can generally protect $300,000 combined. The exemption shields equity from unsecured creditors, but it does not stop a mortgage lender from foreclosing on its own lien, which is why curing the default matters.
Will I owe interest on the mortgage arrears I pay through the plan?
Under 11 U.S.C. § 1123(d), the amount needed to cure a default is set by the loan documents and applicable nonbankruptcy law rather than by bankruptcy formulas. If the note does not call for interest on past-due installments, the plan can propose to pay the arrearage without it, as the Koetters debtors did.
How long can a Subchapter V plan take to cure a home mortgage default?
In a nonconsensual (cramdown) Subchapter V plan, discharge under 11 U.S.C. § 1192 arrives after the debtor completes the payments due during the first three to five years of the plan. Koetters treats that discharge date as the outer limit for finishing the cure.
Can a New Mexico lender still foreclose after I file bankruptcy?
The automatic stay under 11 U.S.C. § 362 halts a pending judicial foreclosure in New Mexico district court once the petition is filed. Filing before the sale matters because afterward the debtor’s rights narrow to the redemption period in NMSA 1978 § 39-5-18, which the mortgage may shorten to one month.
How North Star Law Firm Can Help
North Star Law Firm represents individuals and small businesses in Subchapter V, Chapter 13, and traditional Chapter 11 cases, including plans that cure home mortgage defaults while restructuring practice, ranch, or other business debt. Phillip Zagotti, JD/CPA, is admitted to the United States District Court and the United States Bankruptcy Court for the District of New Mexico, and his accounting background goes into reconciling servicer payment histories and building the projections a Subchapter V plan requires. For New Mexico state-court foreclosure matters the firm works alongside New Mexico-licensed counsel. See also the firm’s post on choosing a bankruptcy chapter as a New Mexico business owner.
If a foreclosure complaint has been filed and student loan or business debt keeps Chapter 13 out of reach, the time to evaluate a Subchapter V filing is before the state court enters judgment. Contact North Star Law Firm to discuss the options.