Court Disapproves Modification to Pay Outside Plan

Posted by NCBRC - April 23, 2015

Using inflexible reasoning, a bankruptcy court found that the debtors could not amend their plan to make mortgage payments outside the plan. In re Vela, No. 12-06512 (Bankr. W.D. Mich. March 13, 2015). The Vela’s plan as confirmed provided for payment of mortgage arrears and regular mortgage payments through the trustee. After the debtors obtained assistance through Michigan’s Helping Hardest Hit Homeowners Program to pay off the arrears on their mortgage, they moved to modify their plan to pay the mortgage directly.

The court found that the proposed amendment satisfied the requirements of section 1329(a) by reducing the time of the plan and reducing payments on the mortgagee’s arrearage claim and the trustee’s commission.

The court nonetheless denied the motion to amend on two bases. First, the court noted that section 1326(c), which provides that “[e]xcept as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan,” creates a presumption in favor of trustee payments. The court found that the only way to overcome this presumption “is to include in the plan or confirmation order a provision allowing direct payments by a debtor or some entity other than the trustee.” A proposed modification does not satisfy this requirement as, “[a]n order approving a post-confirmation amendment is not a ‘order confirming the plan’ within the meaning of § 1326(c): there is only one confirmation hearing and only one confirmation order in any chapter 13 case.” Because the presumption can only be overcome by a confirmed “plan” and a proposed amendment is not “plan” until approved, the method of paying creditors cannot be altered by modification. Though the court’s reasoning appears absolute, it acknowledged that “plan amendments in this district that change the disbursing agent have been effective notwithstanding § 1326(c), ‘after notice and a hearing’ and in the absence of objection prompting the court to disapprove them.”

The court also spoke in unfortunate absolutes with respect to feasibility, finding that that element also disfavored the debtors’ desired modification. Specifically, the court found that the “idea behind the default procedure prescribed in § 1326(c) is that debtors who have proven themselves unable to stay current on their pre-petition mortgage payments require the post-petition discipline and structure of making one periodic payment to a trustee, usually through a payroll order or similar mechanism, who then disburses it to the mortgage lender and other creditors in accordance with the plan.” Thus, the court found that the mere fact that the debtors had fallen behind on their mortgage prior to filing bankruptcy, they were incapable of making the payments outside the plan.

Vela Bankr. WD Mich opinion


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