Direct Mortgage Payments Not “Payments under the Plan” for Discharge Purposes

Posted by NCBRC - March 13, 2018

Payments made directly by the debtor to the mortgagee are not “payments under the plan,” within the meaning of section 1328 and the debtor’s failure to make those payments are not cause for dismissal without discharge. In re Gibson, No. 12-81186 (Bankr. C.D. Ill. March 5, 2018).

Bryan and Holly Gibson made all payments in accordance with their five-year chapter 13 plan, and the trustee filed the notice of payment completion. Mortgage creditor, PNC, agreed that the Gibsons were current on their first mortgage and had paid the arrearage on the second mortgage through the trustee. However, it chose that moment to complain that, as of the beginning of the plan, the debtors had made none of the post-petition direct payments on their second mortgage. On the basis of that default, the trustee moved to dismiss under section 1307(c)(6).

Section 1328(a) requires a court to grant discharge to a debtor who has completed “all payments under the plan.” While the phrase “under the plan” has traditionally been read narrowly to include only those debts paid through the trustee, the court acknowledged that, as argued by the trustee and found by several courts in recent years, it could plausibly be read more broadly to include payments on any debts referred to in the plan. The court, therefore, found the text of the statute to be ambiguous and noted that ambiguity is generally resolved in favor of the debtor especially where discharge is at stake.

The court attributed the recent broad interpretation of section 1328(a) to the 2011 amendment to Rule 3002.1 which added a requirement that, upon the debtor’s completion of plan payments, creditors verify that the debtor is current on post-petition mortgage payments. Prior to 2011, the trustee was unlikely to be aware of a default on direct payments. Looking at the purpose of the amendment to the rule, however, the court found that congressional intent was not to punish delinquent debtors, but to benefit conscientious debtors by giving them a ready reference for later disputes as to their direct mortgage payments.

The court turned to the language of section 1328, which provides on the one hand that discharge is mandated once the debtor has made all “payments under the plan,” and on the other hand that such discharge applies to “all debts provided for by the plan.” The fact that Congress used different phraseology was an indication that the precondition to discharge was intended to be different from the results of discharge. Resolving that difference, the court found that “under the plan” is subject to more narrow construction than “by the plan” and that the former limits the payments necessary for discharge to those paid through the plan by the trustee. This interpretation harmonizes with section 1329’s requirement that modifications be made prior to completion of “payments under the plan” which has been interpreted to refer to payments made to the trustee. With respect to the phrase extending discharge to those debts provided for “by the plan,” the court cited Rake v. Wade, 508 U.S. 464, 474 (1993), for its conclusion that that phrase more broadly includes debts “that a plan ‘makes a provision’ for, ‘deals with,’ or even ‘refers to’.”

The court also reasoned that because a plan cannot extend beyond five years and direct mortgage payments generally are for a longer period, those payments cannot logically be deemed to be part of the plan. When a debtor avails himself of the “cure and maintain” option with respect to his mortgage and arrears, he essentially splits the debt into portions, one of which—the arrears—is paid by the trustee with estate property, and the other—the ongoing mortgage payments—is paid with non-estate funds by the debtor. In fact, the mortgagee need not have filed a proof of claim for the debt or entered the bankruptcy in any way and the trustee’s powers and obligations are limited to ensuring that the debtor makes the required contributions to his plan rather than to monitor the debtor’s direct payments. In the event of a default on direct payments, the mortgage creditor has the option of moving for relief from stay. The fact that section 1328(a) specifically requires a debtor to certify that he has made all domestic support payments as a precondition to discharge further supports the view that Congress did not intend the same condition with respect to direct mortgage payments. Furthermore, where in many cases the trustee may not be aware of defaults on direct payments, granting dismissal in those instances where the trustee is made aware of a default would likely result in similarly situated debtors receiving disparate treatment.

The court noted that “[t]he only creditor harmed by the payment default was PNC which, for reasons not explained at the trial, never took any action in the case to enforce its right to be paid on the 2nd mortgage until it moved for stay relief after the Debtors had made the last plan payment to the Trustee. Unsecured creditors have received all that they were entitled to under the terms of the confirmed plan.”

As a factual matter, the court found that the Gibsons’ failure to make payments to the second mortgage was a result of their mistaken belief that that mortgage was being paid through the trustee along with payments on the arrearage. Thus, their failure to make any post-petition payments on that debt was not evidence of fraud or intentional misconduct. The court did not rule out the possibility that a debtor’s failure to make direct payments could result in denial of discharge but noted that such a drastic punishment would require a case-by-case judgment based on the debtor’s state of mind and conduct.

The court concluded that “a Chapter 13 debtor’s direct payments on a nonmodifiable, nondischargeable residential mortgage loan, provided for under section 1322(b)(5), are not ‘payments under the plan’ for purposes of section 1328(a). A debtor’s failure to complete all such direct payments is not grounds to dismiss the case without a discharge.”

Gibson Bankr CD Ill opinion March 2018



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