Direct Payments to Creditor Are Not “Under the Plan” for Discharge Purposes

Posted by NCBRC - August 26, 2019

Adopting the minority view, the Bankruptcy Court for the D.C. Circuit found that the chapter 13 debtor’s direct payments to a residential lienholder were not provided for under the plan and, therefore, her failure to make all the payments did not preclude entry of discharge. In re Drabo, No. 1:15-bk-653 (Bankr. D. D.C. May 10, 2019) (unpublished).

Ms. Drabo’s plan provided that she would pay her pre-petition arrears and make regular mortgage payments outside the plan until the debt was paid off—an event scheduled to occur five years after the completion of her plan. After she completed all plan payments, she moved for discharge under section 1328(a), but the lender, Ameritas Life Insurance, objected, complaining that Ms. Drabo had failed to keep up with the direct payments under the lending agreement.

The bankruptcy court noted a split among courts as to whether payments made to a lender outside the plan are deemed to be “provided for under the plan” as contemplated by section 1328, with the majority of courts finding that they are and denying discharge to a debtor who fails to maintain those direct payments.

The court cited In re Gibson, 582 B.R. 15 (Bankr. C.D. Ill. 2018), for the minority view that payments made outside the plan are not covered by the language of section 1328, and the failure to maintain those payments has no effect on a debtor’s eligibility for discharge. The Gibson court reasoned that the language of section 1328 was ambiguous. The court then applied the policy of giving the debtor the benefit of doubt when interpreting the Bankruptcy Code.

The Drabo court agreed with the reasoning of Gibson and other courts espousing the minority view. In so holding, the court discussed the expansive reading of “provided for by the plan,” in Rake v. Wade, 508 U.S. 464 (1993), where that Court interpreted the phrase “provided for by the plan” broadly to incorporate any claim which the plan “makes provision for,” “deals with” or even “refers to.” The court here agreed with the Gibson court’s finding that the phrase “provided for under the plan” was subject to a more narrow interpretation, with the line of demarcation being whether the payments were made through the plan or outside the plan directly by the debtor. The Gibson court noted that, unlike debtors paying domestic support obligations, debtors paying secured creditors outside the plan do not have a statutory obligation to certify that those payments are being made.

Turning to the specifics of this case, the court began with the language of the debtor’s plan which indicated that all plan payments were to be made through the trustee. This language, the court found, excluded payments made directly to the creditor by the debtor. The fact that the debtor did not choose to avail herself of the cure and maintain option offered by section 1322(b)(5), and that the terms of Ameritas’s claim required that the debtor complete her payments five years after the close of her bankruptcy case in what would be a violation of 1322(d)(2)’s requirement that all plan payments be complete in no more than five years, further removed the debt from her bankruptcy case.

The court found that, by keeping the debt out of her bankruptcy, Ms. Drabo was “throwing herself on the mercies” of non-bankruptcy law, allowing Ameritas to retain all its rights under that law (subject to Ameritas’s eligibility for relief from stay during the bankruptcy). Where it is well-settled that discharge affects only the debtor’s personal liability, Ameritas’s lien passed through her bankruptcy unaffected, leaving Ameritas’s in rem rights intact. In sum, the court found, “[t]he better view of the provision for direct payment of Ameritas’s claim is that the Plan did not provide for the claim at all other than to leave it unimpaired: it did not attempt to alter Ameritas’s rights in any fashion, and simply left the claim to be dealt with by the debtor directly.”

The court therefore overruled Ameritas’s objection to Ms. Drabo’s discharge.

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