Win at Confirmation, Lose the House

The finality of plan confirmation was a two edged sword for the debtor’s lawyer defending a relief from stay motion.

You win, for now, the judge told him.  But the train wreck is coming.

The lender’s lawyer complained, unsuccessfully it turned out, that the mortgage payment had increased from the payment at confirmation.   The plan simply provided a number that reflected the mortgage payment at the commencement of the case.

Contractually, the debtor was now significantly underpaid to the contract payment schedule.

Held:  the confirmed plan controlled and the mortgage lender was not entitled to relief from stay.  Regardless of the contractual payment schedule, a confirmed plan was binding.

But, at plan completion, the debtor will be significantly in default if he adheres to the payments in the plan. Worse, there will be no stay and no impediment to initiation of foreclosure.

The advice from the bench was clear:  debtor’s counsel would do well to find a catch up formula if the debtor expected to avoid immediate default at discharge.

Magic language?

I’m surprised I haven’t seen or experienced this before.  The results seem logical and the fact pattern all too common with adjustable mortgages.

I don’t have personal experience I can call on, but I’m thinking I would propose language like this to provide for on going mortgage payments:

$current payment figure, or such other amount as provided by contract

Anyone have a different approach?

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  1. I’m not sure I completely follow the facts.  Was the debtor paying the mortgage payments through the plan?  In my district, the debtors pay the mortgage outside of the plan and only address the arrearage in the plan (if any).  If my client has an ARM, I try to anticipate the payment increase and adjust the proposed plan payment accordingly.  Either that or push the clients to get a fix rate mortgage before they file.

  2. David Yen says

    One way of dealing with this problem can be found in the model plan for Northern District of Illinois

    If debtor is making post-petition mortgage payments:
    The debtor will make current monthly payments, as listed in the debtor’s Schedule J-increased or decreased as necessary to reflect changes in variable interest rates, escrow requirements, collection costs, or similar matters-directly to the following creditors holding claims secured by a mortgage on the debtor’s real property:Creditor:

    If trustee is the disbursing agent for post-petition mortgage payments
    Current mortgage payments. Payable according to the terms of the mortgage, as set forth below, beginning with the first payment due after the filing of the case. Each of these payments shall be increased or decreased by the trustee as necessary to reflect changes in variable interest rates, escrow requirements, or similar matters; the trustee shall make the change in payments as soon as practicable after receipt of a notice of the change issued by the mortgage holder, but no later than 14 days after such receipt. The trustee shall notifythe debtor of any such change at least 7 days before putting the change into effect. Any current mortgage payment made by the debtor directly to the mortgagee shall be deducted from the amounts due to be paid by the trustee under this plan.

    • CathyMoran says

      David, thanks. That’s helpful.

      Carl, in the NDCA, we pay on going mortgage payments directly, but the plan sets out the amount of the direct payment. Here the direct payment provided for in the plan was less once the payment adjusted post confirmation. Thus the debtor was post petition deilnquent on the mortgage, according to contract terms.


  3. If the mortgage is paid directly, outside the  plan, why wouldn’t the debtor simply pay the mortgage payments as currently owed instead of paying the lesser amount described in the plan?

    • CathyMoran says

      Good question: he wasn’t doing so in the case I saw play out. I see no reason why that wouldn’t have been perfectly OK.


  4. Jay Perez says

    How about a plan that directs the Trustee to simply pay the ongoing post-petition payments.   No need to even list a payment amount.   The debtor has no authority to modify the loan [per 1322(b)(2)] so why have the plan dictate the payment amount?   

    Plans determine treatment, claims establish amounts.   If the debtor doesn’t like the claim, she can object to the claim.  

    The claim is then modified in accordance with Rule 3002.1 if the payment amount needs to adjust for any reason.   The trustee then puts the new payment into action as determined by the Notice of Payment Change that the creditor files with the court.

    I routinely pay all mortgages via the Trustee conduit and never have any problem because my plan instructs the trustee to pay the “mortgage payments” without locking them into any set amount.   Here is the plan language I use:

    following mortgage creditors shall be paid all allowed pre-petition arrearage claims
    and the ongoing post-petition mortgage installments through the Trustee. 

    The Estimated Currently Monthly Installment listed
    below and Estimated Arrears amount listed below are estimates only.  Trustee shall disburse according to the
    amounts listed in the allowed Proof of Claim (which may be further adjusted by
    appropriate notice in accordance with Rule 3002.1).