A mortgage refinance agreement approved by the court is not equivalent to a motion to modify under section 1329. The debtors, who failed to pay their property taxes directly as required by their plan were not entitled to discharge even though the mortgagee paid those taxes on their behalf and the debtors and mortgagee refinanced their lending agreement to encompass that change. In re Villarreal, No. 16-10106 (Bankr. S.D. Tex. April 12, 2022). [Read more…] about Failure to Pay Property Taxes Precludes Discharge
Mortgage May Be Bifurcated Under Section 1322(c)
The Bankruptcy Court for the Eastern District of Wisconsin joined the majority of courts in finding that section 1322(c)(2) “authorizes modification of a principal residence loan through bifurcation, when the last payment on the original payment schedule is due before the final plan payment is due.” In re Harris, No. 21-26280 (Bankr. E.D. Wisc. March 16, 2022).
The debtor filed her chapter 13 petition shortly after the final balloon payment was due on her home mortgage. At the time of her petition, she owed $78,009.00 on the mortgage and she valued the residence at $45,000.00. In her plan, she proposed to bifurcate the claim and pay the entire secured portion and none of the unsecured portion. The mortgage creditor objected to confirmation on three grounds only one of which was addressed in this order. That issue was whether section 1322(b)(2) precluded the debtor from modifying the treatment of the mortgage beyond altering the terms of the repayment schedule. [Read more…] about Mortgage May Be Bifurcated Under Section 1322(c)
No Mortgage Modification for Mixed Use Property
The chapter 11 debtor could not modify her residential mortgage even though much of the property securing the mortgage was used for income-producing purposes. Lee v. U.S. Nat’l Bank Ass’n, No. 20-222 (M.D. Ga. Oct. 4, 2021).
The debtor’s residence was located on forty-three acres of land of which she rented out approximately thirty-five acres as farmland. She took out a mortgage on the property in 2007 and, acting on the advice of the mortgagee, in 2010, allowed the mortgage to go into default in the expectation of refinancing the loan under the federal Housing Action Resource Test (HART). When she was unable to refinance, she filed for chapter 11 bankruptcy seeking to modify the mortgage.
US National Bank filed a claim as trustee for RMAC Trust, Series 2016-CTT (the Trust), in the amount of $253,070.25, representing $139,195.75 in unpaid principal and $82,228.15 in interest. It moved for relief from stay, and the bankruptcy court granted the motion finding that section 1123(b)(5) prohibited modification of the mortgage. The debtor appealed to the district court. [Read more…] about No Mortgage Modification for Mixed Use Property
“Effective Date of the Plan” for Best Interests Test upon Modification
The best interests test does not provide authority to compel turnover through plan modification of settlement funds from the debtor’s post-petition personal injury case where that money would not be available to unsecured creditors in a case converted from chapter 13 to chapter 7 under section 348(f). In re Taylor, No. 16-40873 (Bankr. D. Kans. July 21, 2021). [Read more…] about “Effective Date of the Plan” for Best Interests Test upon Modification
Modification under CARES Act
For plan modification under the CARES Act, the debtor need not have been current in plan payments prior to enactment of the Act. In re Gilbert, No. 16-12120 (Bankr. E.D. La. Oct. 6, 2020).
In four separate cases, debtors sought to modify their chapter 13 plans under section 1329(d) which Congress added to the Bankruptcy Code as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In all four cases, the debtors’ plans were confirmed and they fell behind on payments prior to March 27, 2020. In three of the cases, the debtors sought modification of their plans to pay off the arrearages and extend the length of the plan beyond sixty months. In the fourth case, the debtor sought only to reduce payments to unsecured creditors. The trustee opposed the modifications arguing that the CARES Act permits modifications only if the debtors first fell behind in their plan payments after March 27, 2020, and the sole reason for the default was the pandemic.
The bankruptcy court disagreed. [Read more…] about Modification under CARES Act
Debtor May Not Modify to Surrender Residence after 60 Month Plan Complete
Debtors were precluded from modifying their plan to surrender their residence where the surrender was a “payment” under the plan and was beyond the sixty-month plan period. Derham-Burk v. Mrdutt (In re Mrdutt), No. 17-1256 (B.A.P. 9th Cir. May 6, 2019).
When chapter 13 debtors, Christina and David Mrdutt, filed their bankruptcy petition, Wells Fargo held two liens on their residence. The first lien was under-secured and the second was wholly unsecured. The Mrdutts were also almost $65,000 in arrears on their mortgage. They proposed a plan providing for curing their mortgage arrearage either after loan modification or as proposed in a later plan modification. In the meantime, the Mrdutts agreed to maintain direct mortgage payments to Wells Fargo outside the plan.
The bankruptcy court confirmed their plan while their request to modify the primary mortgage was still pending with Wells Fargo. The Mrdutts made all 60 of their plan payments but failed to maintain necessary direct payments to Wells Fargo. Ms. Mrdutt died of cancer during the bankruptcy, and Wells Fargo, being Wells Fargo, refused to discuss loan modification with Mr. Mrdutt because only Ms Mrdutt’s name was on the loan. Wells Fargo never approved a loan modification, and the mortgage arrears were not cured either through the plan or outside it. [Read more…] about Debtor May Not Modify to Surrender Residence after 60 Month Plan Complete
District Court Certifies Appeal of 100% Plan Language Restricting Right to Modify
In Brown v. Viegelahn, No.18-282 the District Court for the Western District of Texas, on its motion, certified an appeal to the Fifth Circuit to resolve a dispute among lower courts concerning the so-called Molina language in which a Chapter 13 debtor paying less than his entire disposable income to his 100% plan, is required to agree that he will not later modify the plan to pay less than 100% to unsecured creditors. (appeal certified, Jan. 22, 2019). [Read more…] about District Court Certifies Appeal of 100% Plan Language Restricting Right to Modify
Whaley v. Guillen, No. 17-13899 (11th Cir.)
Type: Amicus
Date: January 23, 2018
Description: Whether Chapter 13 debtors are required to show an unanticipated change in circumstances in order to exercise the statutory right to modify their repayment plans under 11 U.S.C. § 1329.
Result: Pending
Court Takes a Hard Line on Curing Direct Mortgage Payment Default
A loan modification to cure a post-confirmation default on direct mortgage payments must be approved by the court prior to expiration of the chapter 13 plan. In re Hanley, 2017 WL 3575847, No. 11-76700 (Bankr. E.D. N.Y. Aug. 14, 2017).
Brian and Anahi Hanley’s confirmed chapter 13 plan provided for cure of their mortgage default through the plan and for regular mortgage payments to be made directly to the mortgagee, Nationstar Mortgage, LLC. They fell behind on their direct mortgage payments and, several months before completion of their plan, they entered into a trial loan modification which would cure the post-confirmation default. Though the Hanleys made all payments under the loan modification, they failed to sign and return the Loan Modification Approval Letter within the time required by Nationstar.
At the expiration of their plan, Nationstar filed a Rule 3002.1 Response notifying the court of the default based on the loan as it stood prior to the trial loan modification. The trustee moved to dismiss their bankruptcy without discharge. The Hanley’s moved to strike Nationstar’s Response and sought to modify their plan to allow them to cure the default in accordance with the terms of the loan modification.
For purposes of its decision, the court adopted the Hanleys’ factual assertion that the parties had agreed to the loan modification but had not submitted it to the court for approval. It thus framed the issue as “whether a chapter 13 debtor may cure an acknowledged default in post-petition direct mortgage payments, to be made pursuant to a confirmed chapter 13 plan, through a loan modification approved after the expiration of the 60th month.”
In answer to this question, the court found that the debtors had two choices for dealing with the post-petition default: modify the loan or modify the plan. It explained that a loan modification entered into by the parties outside the plan may cure a default even though the new loan terms are not memorialized in a plan modification. Alternatively, the cure of a post-confirmation default may be accomplished through a plan modification without an agreement between the parties to modify the loan. However, both options, the court emphasized, required approval by the court prior to expiration of the plan.
Acknowledging the “draconian” nature of denying discharge after the Hanleys had made all plan payments for five years, the court reasoned that its equitable powers were constrained by the Code and the terms of the Hanleys’ plan. Section 1328(a) makes discharge contingent upon completion of all plan payments, and relevant case law establishes that where a plan provides for mortgage payments outside the plan, those payments must be current as well.
The court noted that there is a line of cases in which courts have held that post-confirmation plan modifications to cure post-petition mortgage defaults are not permitted at all under section 1329. The court disagreed with or distinguished those cases, finding that, where, as here, the secured creditor’s rights under the loan agreement would not be altered by the modification, section 1329(a)(2) permits a modification extending the time for repayment. The court reiterated, however, that any such plan modification must take place prior to the expiration of the plan.
The court also recognized that some courts permit chapter 13 debtors to cure defaults post- plan completion either on equitable principles or on the theory that “the debtors are not seeking to extend the plan, rather they are only curing a default on already scheduled payments.” The court declined to adopt their reasoning finding instead that the Code does not allow for leeway in curing a default on plan payments. Citing sections 1322(a)(4), (d)(1), (d)(2), 1325(b)(1)(B) and 1329(c), and calling it a “drop dead jurisdictional deadline,” the court concluded that the right to discharge requires all plan payments be complete at the expiration of the plan.
Nor would the court permit a retroactive loan modification to cure the default in light of Nationstar’s position that it had not ultimately agreed to the modification.
The court granted the trustee’s motion to dismiss under section 1307(c)(6) due to a “material default.”
Plan Modification to Surrender 910 Vehicle Permissible
So long as the modification is proposed in good faith a debtor may modify a plan which originally provided for a “910 Claim” to be paid off in its entirety, to one in which she surrenders the vehicle and treats any deficiency as unsecured. In re Fayson, No. 16-10013 (Bankr. D. Del. July 13, 2017).
After experiencing maintenance problems and a dispute relating to an undelivered warranty on her 910 vehicle, Tabitha Fayson sought to modify her Chapter 13 plan to surrender the vehicle and treat the deficiency as unsecured. Citing In re Nolan. 232 F.3d 528 (6th Cir. 2000), the creditor argued that the modification she sought was prohibited under the Code. The court disagreed and joined the majority of bankruptcy courts finding that treatment of 910 claims may be modified in the manner sought by Ms. Fayson. [Read more…] about Plan Modification to Surrender 910 Vehicle Permissible