Debtor Cannot Cure Default After Expiration of Plan

Posted by NCBRC - July 30, 2021

The bankruptcy court correctly dismissed the debtor’s chapter 13 case after she missed her final two mortgage payments under her five-year plan, even though, shortly after the plan expired, she paid the arrears in full. In re Kinney, No. 20-1122 (10th Cir. July 23, 2021).

The debtor entered bankruptcy current on her mortgage payments, and her chapter 13 plan provided for continued payments to the mortgagee, HSBC Bank USA,  “under the plan.” A few months prior to completion of her plan, the debtor was injured in a car accident and, for that reason, missed two mortgage payments before the plan expired and two additional payments after its expiration. She then made the back payments and sought discharge. The bank opposed discharge and moved to dismiss her bankruptcy. The bankruptcy court found that it lacked discretion to grant a discharge and granted the motion to dismiss. After her motion for reconsideration was denied, the debtor was granted leave to appeal directly to the Tenth Circuit.

The circuit court began with section 1328(a) which provides that a debtor is entitled to discharge upon “completion . . . of all payments under the plan.” The court found that the phrase “under the plan,” was ambiguous such that it was unclear whether payments made after the five-year term of the plan had expired could be considered to have been made under the plan.

The court noted that there are three ways a bankruptcy court may conclude a chapter 13 case: 1) grant discharge under section 1328(a), 2) dismiss the case under section 1307(c)(6), or 3) convert the case to chapter 7 under section 1307(c)(6). Both dismissal and conversion use the word “may” to give the court discretion as to their application. Section 1328(a), on the other hand, provides that the court “shall” grant discharge upon completion of plan payments.

The question before the court was whether the debtor’s late payment was simply curing a default “under the plan,” as argued by the debtor, or was an impermissible modification of the plan, as argued by the bank.

The answer turned on interpretation of the “chameleon” word “under.” In context, the court found that the word “under” meant “subject to” or within the “authority of,” the terms of the plan. It found “the more natural reading here is that the payments could fall ‘under’ a plan only if the plan remained in existence.” Thus, the debtor’s late payment could not have been made “under the plan,” within the meaning of section 1328(a).

The debtor argued that section 1307(c)(6), which authorizes dismissals, is controlling and allows the court discretion not found in section 1328(a). She maintained that the bank’s position effectively erases the word “may” from section 1307. The court rejected this argument, finding that the mandatory language in section 1328(a) was controlling, and that a bankruptcy court retains its discretion with respect to dismissal by its authority to allow a plan modification under section 1329, or to grant the debtor a hardship discharge.

The court agreed with the bank that sections 1322 and 1329 further support its conclusion, as both sections specifically limit the length of a plan to five years. Nor did section 1325(a)(6) afford the debtor any relief. That section requires confirmation of a plan when “the debtor will be able to make all payments under the plan and to comply with the plan.” While that section suggests that not all plan payments must be in strict accordance with plan terms, the court found it did not provide leeway for plan payments to take place after expiration of the plan.

The court also rejected the debtor’s argument that section 1328(a), by omitting the term “timely,” left open the possibility that untimely payments could considered to be “under the plan.” Finding that “timely” could reasonably be interpreted to mean either “within the 5-year period,” or “by the due-date for each monthly payment,” the court found the correct interpretation was the latter. For that, it relied on legislative history and congressional intent. The court reasoned that the five-year limit was Congress’s effort to end unduly lengthy plans which placed debtors in positions of “indentured servitude.” The court recognized that the strict time limitation, while favorable to debtors as a whole, may disadvantage some individual debtors, but noted that, in 2020, Congress added paragraph (i) to section 1328 to allow debtors in Ms. Kinney’s position to obtain discharge if the debtor entered into a loan modification or forbearance agreement with the mortgagee.

The court affirmed the bankruptcy court’s dismissal.

In a concurring opinion, Judge Eid argued that the statutory scheme was unambiguous.

Kinney 10th Cir July 2021


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