Are your clients entitled to a chapter 13 discharge if they have missed post petition mortgage payments?

From Aki Koyama:

Are your clients entitled to a chapter 13 discharge if they have missed post petition mortgage payments?

A couple of bankruptcy court level decisions have said no.

In Heinzle 511 B.R. 69 (W.D. Texas May 30, 2015), the trustee moved for dismissal of the case and denial of discharge after the debtor had completed all plan payments but missed 30 post petition mortgage payments pursuant to BAC’s response to the Notice of Final Cure. Turning strictly on the meaning of “payments under the plan” in 1328(a), the court determined that post petition mortgage payments that the debtor was required to make “directly” to the mortgage lender are “payments under the plan” and therefore the debtors had failed to meet 1328(a). The court dismissed the case and denied the debtors’ discharge.

In Doggett (WL 4099806 D. Colorado 2015) , a case which cites to Heinzle, the court issued a discharge after the debtor completed all plan payments.  However, after having reviewed the docket on the court’s own initiative, the court issued an OSC Why the Debtor’s Discharge Should Not be Vacated as Improvidently Granted.

The court found that the debtors had not completed all “payments under the plan” because the mortgage lender filed a response to the Notice of Final Cure indicating that the debtors had not cured the prepetition arrearage and made all post petition mortgage payments required to be made under the plan. The prepetition arrearage shortfall arose from a proof of claim that showed a greater arrearage than what the plan proposed to pay (this is a jurisdiction where the plan controls the amount paid and not the proof of claim). The court also based much of its holding on the debtors’ failure to make all post petition mortgage payments.

Based on the foregoing, the court vacated the discharge order and dismissed the debtors’ case.

Heinzle comes out of the 5th Circuit and Doggett comes out of the 10th Circuit.

Some responses to this Facebook post:

From Aki:  This is how the cases regarding student loan discrimination developed. It started small and then went big. Some judge in Michigan had some dicta in a case where he was wondering about what factors could be used to define what is “unfair” discrimination on a case by case basis. Some judge in Texas jumped on this dicta, formalized the Michigan judge’s dicta by creating factors out of them and then this spread around the country until the 9th circuit BAP adopted these factors. The factors aren’t very clear and difficult to use but now many Circuits use this law and it all started with a lonely Michigan judge’s meanderings.

From Clifford Bordeaux:  Seems like this issue could be addressed with a MOMOD to surrender the property, if judges start doing this.

From Aki:  @Cliff – That’s a good idea. But what if you don’t know that your clients are behind on post petition mortgage payments and don’t find out until the last payment under the plan has already come due.  Most Notice of Final Cures go out after the final plan payment has been made and debtor counsel often do not find out about the post petition mortgage payment delinquency until the mortgage lender files a response.

From Cliff: After the final plan payment has been made, yes. But not after “all payments under the plan” have been made, per this analysis.  So if “all payments under the plan” have not been made, I would argue that it is not too late to modify the plan. I’m not sure if a judge would agree, though.

From Aki: – I guess it will depend on how the judge interprets 1329(a) and the phrase, ” . . . but before completion of plan payments under such plan” for determining the deadline to file a MOMOD for your client. Most judges that I have seen adjudicate this issue have interpreted this language to mean when the last plan payment has come due.

From Aki: There is ambiguity in the language which is good. But like I said, most judges and trustees read that as “plan payments” but if it ever comes up, it’s worth briefing and getting a ruling that can be appealed if unfavorable.

From Aki:  I don’t know how the granting of a motion for relief from stay will affect a judge’s ruling on this issue if the judge subscribes to Heinzle. Is the requirement to make all direct mortgage payments independent of relief from stay on the issue.  Is the requirement to make all direct mortgage payments independent of relief from stay on the issue and a pending loan modification? Most judges apply the law before applying equity to a case. I don’t know if fairness will come into play if there is sufficient legal authority to hold a certain way.

From Aki: I think a possible solution is to add miscellaneous language to a plan that provides that failure to make direct payments will not bar the debtor from receiving a discharge. There is no 9th Circuit case law on the issue and certainly no appellate level law in any other circuit across the country. At least for now.

From Erika Luna-Davis: Judge Wayne Johnson in Riverside requires that you provide a detailed declaration with a table showing when each mortgage payment was made for the entire 60 months in order to receive a discharge. Luckily my client was current on mortgage payments but I can see him adopting this. I wonder if he’s already denied discharge on this same basis?

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