Chapter 13 provides the debtor with a discharge upon completion of all payments under the plan. For many years this has worked well, and debtors received a discharge even if they have not made all the payments which were to be made directly to creditors.
Payments made to creditors through the plan by the trustee have always been monitored by the trustee. Failure to make payments to the trustee would result in a Motion to Dismiss. Failure to make payments directly to creditors, such as those for a home mortgage or student loans might result in that creditor bringing a Motion for Relief from Stay or a Motion to Dismiss. Home mortgage lenders often brought such Motions and other creditors did so rarely.
In 2011, bankruptcy rule 3002.1 came effective. That rule requires the Chapter 13 trustee to provide a Notice of Final Cure Payment to any creditor secured by the debtor’s principle residence. Typically, the trustee will, by that Notice, inform the secured creditor that all mortgage arrearages were paid and cured through the plan.
- The creditor must respond within 21 days.
- The creditor can respond by agreeing with the trustee or may indicate that the debtor is delinquent on other amounts to the creditor.
- If the creditor does not agree that the debtor is current on all mortgage payments, either the trustee or debtor may request a hearing before the court.
Recently trustees and creditors have begun asking courts to dismiss Chapter 13 cases, or deny the debtor discharge, when the debtor is delinquent on direct payments at the end of the plan. If the plan was for less than 60 months the debtor may still, at that point, have an opportunity to amend and make up the missed payments. However, if the plan was for the maximum 60 months, either required or permitted by law, the debtor has no ability to extend the plan to cure the arrears.
Most courts which have considered this issue have ruled against debtors. They have found that payments to be made direct by debtors are payments “under the plan.” The debtor, therefore, cannot receive a discharge without having made such payments. This can be an extremely harsh result.
Imagine a debtor who has made payments through the plan to creditors for 58 months and has made all required direct payments during that time. Then, shortly before the case is over, the debtor loses employment and cannot afford to pay the direct mortgage payments. Some courts deny that debtor discharge of all debts simply because payments to the mortgage lender, whose debt will not be discharged in any event, are a payment, or two, behind.
Armed with this new knowledge, some trustees have begun bringing Motions to Dismiss, or to deny the debtor a discharge. Some courts have instructed trustees that they have a duty to do so. No one intended this result when the rule was enacted. The rule was designed to help debtors.
Negligent and improper mortgage loan and servicing practices often left debtors with no way of knowing how much they owed. This, in turn, resulted in foreclosures being started or continued shortly after the completion of Chapter 13 cases. By requiring the mortgage lender to certify the current balance, there was hope that debtors would have more knowledge and an ability to avoid foreclosure.
Instead, the result is becoming a nightmare for Chapter 13 debtors. There are, however, always options, including the following:
- If the case is dismissed, refile. This can pose its own problems, particularly if a creditor is previously brought a motion for relief from stay in the case; however, starting over is better than being denied a discharge.
- Dismiss the case voluntarily. Again, this may present other issues, but is likely better than denial of a discharge.
- Convert the case to Chapter 7. This might reinstate various obligations which the debtor crammed down in the Chapter 13 case, but it should leave the debtor eligible to quickly file a new Chapter 13 case.
- Seek a hardship discharge in the pending Chapter 13 case. The code permits a debtor to receive a discharge without completing all payments under the plan, but only if the cause of the failure to be able to pay is beyond the control of the debtor and modification of the plan is not practical. For some debtors, proving these elements may be quite difficult.
- Seek and obtain a modification of the mortgage loan. This will likely have to be accomplished quickly, and perhaps without further payment to the secured creditor upon the arrears. The code requires that all payments under the plan be pleaded in 60 months. It does not specifically provide that all other elements or conditions be so completed in that time frame.
- Litigate the issue with the trustee. While most courts have ruled against the debtor, not all the legal arguments relating to statutory construction were presented to those courts. There are good arguments on both sides of this issue, and we have no decisions yet from the United States Supreme Court, or even any of the Circuit Courts of Appeal.
Until we have a binding decision in Wisconsin courts, we like the approach taken by the bankruptcy courts in the Eastern District of Wisconsin. Local rule 4004 requires that Chapter 13 debtors who make direct payments certify that all those payments have, in fact, been made. Without that certification the debtor cannot receive a discharge, but the discharge is not denied. Instead, the case is closed without granting a discharge. This means the debtor may later move the Court to re-open the case and grant a discharge if the debtor can demonstrate that (s)he is eligible for discharge.
We have always warned debtors, and in writing, of the importance and need for them to make all their direct payments to creditors. This new activism on the part of trustees in some courts makes those payments even more important.
For our part, we are instructing our clients to submit, annually, a qualified written request to each mortgage lender and to request annual balances from other creditors. In this way we will know, at least annually, whether the required payments are being made and have enough advance notice to protect our clients.
