Direct Mortgage Payments: Inside, Under, Or Outside The Plan

payments under plan


Are post petition payments on the debtor’s mortgage “under the plan”?

Not in the view of  one judge.

Direct payments on a a residential mortgage loan are not “payments under the plan” for purpose of Bankruptcy Code § 1328(a),

Thus Judge Thomas Perkins struck back at the cases that have used failure to maintain mortgage payments during a Chapter 13 case as grounds to find debtors ineligible for a Chapter 13 discharge.

Judge Perkins’ opinion in Gibson noted that §1328(a) had included the phrase “all payments under the plan” since the Bankruptcy Code was adopted in 1978.  But prior to Heinzle, 511 B.R. 69, it had never been interpreted to bar a discharge to debtors who failed to make post petition mortgage payments.

No good deed…

The problem came to the surface with FRBP 3002.1.  The rule was adopted to aid debtors in keeping their homes by imposing transparency on the state of mortgage loans at the end of a Chpater 13.

Before the rule became effective in 2011, the trustee had no way to know if post petition mortgage payments had been, in fact, made.  Now, the state of the mortgage at plan’s end becomes a matter of public record, assuming that the secured creditor responds accurately to the Notice of Final Cure Payment.  [Remember, however, the law school axiom about assumptions.]

Some judges have seized on the failure to make all mortgage payments as a material default under the plan and granted motions to dismiss.

Others, faced with delinquencies, have implied an opportunity to cure post petition arrears and denied motions to dismiss.

Congress and the choice of phrase

The lynchpin of the Gibson decision lies in a distinction the court draws between language used in §1328.

as soon as practicable after completion by the debtor of all payments under the plan… the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title…

“Payments under the plan” is different than payments on debts “provided for by the plan.”\

In section 1328(a), “all payments under the plan” is used to define when completion of
payments occurs (thus triggering entitlement to a full compliance discharge), while the similar but
different alternative phrase “provided for by the plan” is used to describe the scope of the discharge. 11
U.S.C. §1328(a). The use of different terminology implies an intended distinction. “Provided for by the
plan,” has been expansively construed to mean that a plan “makes a provision” for, “deals with,” or
even “refers to” a claim. Rake v. Wade, 508 U.S. 464, 474 (1993). Congress could have defined the event
of plan completion as “completion by the debtor of all payments provided for by the plan.” Instead,
Congress chose to use a different phrase. In this Court’s view, the alternative phrase “under the plan”
was intended to have a narrower effect, allowing for the possibility that not all creditors holding debts
provided for by the plan are receiving payments under the plan. There may be some payments made to
creditors who are provided for by the plan that are not payments under the plan. The most logical line of
demarcation is between payments made by the trustee from funds received from the debtor versus
payments made by the debtor direct to a creditor.

Three cheers for Judge Perkins who wrote that dismissal of a Chapter 13 case after the debtor has made all required payments to the trustee is a punishment that does not fit the “crime”.

May his view be accepted in more courts.