Connecting through community

Best Case Home » Community Articles » Court Decisions » Default on direct mortgage payments not a basis to deny discharge
Default on direct mortgage payments not a basis to deny discharge

A bankruptcy court in Georgia rejected a chapter 13 trustee’s bid to deny debtors their discharge because the debtors defaulted on direct post-petition mortgage payments. Adding to the split of authority, the court adopted the minority position and held that payments made directly to creditors are not made “under the plan” and therefore a post-petition default is not “cause” to dismiss the debtor’s case or to deny the debtor a discharge. “Payments under the plan,” the court said are limited to payments the debtor makes to the trustee (In re Simmons, No. 14-10757, 2019 Bankr. LEXIS 3112, Sep. 30, 2019).

The debtors in this consolidated case completed the payments required by their confirmed chapter 13 plans but they defaulted on direct post-petition payments to their mortgage lenders. The debtors’ confirmed plans provided that prepetition arrears would be cured by the trustee but that the debtors would “make post-petition payments direct to [their secured home mortgage lender] according to the contract on the [ ] long-term debt.” In one case, the trustee discovered the default in direct mortgage payments after the lender filed its response to the trustee’s Rule 3002.1 notice and noted a delinquency. In the other case, the lender filed a motion for stay relief. The trustee filed motions to dismiss “for cause” under Bankruptcy Code Sec. 1307(c)(6) and to deny discharge, arguing the debtors’ failure to maintain direct payments was a material default of the terms of their confirmed plans.

The bankruptcy court denied the trustee’s motions on both policy and statutory grounds. The court rejected the majority position that “payments under the plan” include payments made directly to creditors. A bankruptcy court is directed by Sec. 1328 to grant a debtor a discharge after completion by the debtor of “all payments under the plan.” Section 1328 uses both “payments under the plan” and “provided for by the plan” and therefore the court reasoned that the phrases must have separate meanings and that not all creditors holding debts provided for by the plan are receiving payments under the plan.

Additionally, limiting the scope of the phrase “payments made under the plan” to payments made to the trustee was consistent with the use of the phrase elsewhere in the Code. For example, Sec. 1329(a) authorizes modifications until the last plan payment is made. The section has always been interpreted to mean that a debtor may modify his plan up until the last plan payment is made, and interpreting “payments under the plan” to include direct mortgage payments could extend a plan beyond to the maximum five-year life span of a chapter 13. Likewise, Sec. 326 provides for trustee compensation of up to five percent on “all payments under the plan.” This section also has been understood as authorizing a commission only on payments made by the trustee and not on direct payments made by the debtor. In fact, debtors often choose to make direct payments to avoid the trustee’s commission on long-term obligations.

Finally, Bankruptcy Rule 3002.1 requires the trustee to notify a creditor with a secured claim against the debtor’s residence after a final cure payment “under the plan” is made. Under the majority approach, this notice requirement would never be triggered if the debtor is delinquent on post-petition direct payments, the court noted. Nonetheless, the majority approach is rooted in Rule 3002.1. However, before the rule was adopted, courts generally would grant chapter 13 debtors a discharge despite an uncured default in direct payments, either because the trustee was unaware of the default or a default in direct plan payments was not viewed as a basis to dismiss a case without discharge. There is no indication that Congress sought to change longstanding practice, the court concluded. Finally, the court observed that there was no basis in the Code to deny a debtor’s overall discharge for “merely defaulting” on a post-petition direct mortgage payment. Harsh treatment such as the denial or revocation of discharge generally is reserved for fraud or other bad conduct by the debtor.