For the first time among the courts of appeals, two judges on an Eleventh Circuit panel held that direct payments by a chapter 13 debtor to a mortgagee are not “provided for by the plan” under Section 1328(a), even if the plan says the payments will be made directly.

However, all three judges agreed that a general chapter 13 discharge did not eliminate the debtor’s personal liability for a deficiency on a home mortgage.

The majority’s December 6 opinion by Circuit Judge Julie Carnes means that chapter 13 debtors with direct mortgage payments may have lost a battle, but they could have won a larger war.

Whether direct mortgage payments are made under a plan has greater significance in a related context. A chapter 13 debtor who has made “all payments under the plan” is entitled to a discharge under Section 1328(a). If the Eleventh Circuit’s holding with respect to debts “provided for by the plan” also applies to “all payments under the plan,” then a chapter 13 debtor who has defaulted on direct mortgage payments would still be entitled to a chapter 13 discharge shedding other debts that were provided for in the plan.

On the question of a general chapter 13 discharge, the lower courts are split on whether failure to make direct mortgage payments bars a chapter 13 debtor’s general discharge. For example, click here to read ABI’s discussion of Simon v. Finley (In re Finley), 18-4011, 2018 BL310219 (Bankr. S.D. Ill. Aug. 28, 2018), showing how the bankruptcy courts in Illinois disagree on giving a discharge to a chapter 13 debtor who missed direct mortgage payments.

The Facts

The debtor filed a chapter 13 petition and confirmed a three-year plan. The debtor’s home mortgage was current on filing. The plan specifically provided that the debtor would continue making direct payments to the holder of the mortgage and would not route mortgage payments through the chapter 13 trustee, thus avoiding the fee that the trustee would charge.

Shortly after filing, the debtor filed a motion seeking authority to make mortgage payments directly. The order granting the motion terminated the automatic stay as to the mortgage by permitting the mortgagee to seek in rem relief against the property if there were a default.

Over the life of the plan, the debtor made total payments of about $5,700, including some $3,600 earmarked for creditors. None of the debtor’s payments were for the mortgagee.

According to Judge Carnes, the plan did not specify repayment terms for the mortgage, did not contain a schedule of payments, and did not make any alterations to the mortgage.

About one year after confirmation, the debtor stopped making mortgage payments. However, the debtor made all payments to the trustee and received her chapter 13 discharge.

Meanwhile, the mortgagee foreclosed the home and sought a deficiency judgment against the debtor. A year after discharge, the mortgagee reopened the chapter 13 case and filed suit for a declaration that the debtor’s personal liability for a deficiency on the mortgage had not been discharged.

Upheld in district court, Bankruptcy Judge Caryl E. Delano of Tampa, Fla., granted summary judgment in favor of the lender, holding that the deficiency was not discharged.

The debtor appealed to the circuit court, to no avail.

‘Provided For By’

Once a debtor completes all payments “under the plan,” the last phrase in Section 1328(a) gives a discharge for “all debts provided for by the plan.” The debtor thus argued on appeal that the unsecured deficiency claim was discharged because the mere mention of the mortgage in the plan meant it was “provided for by the plan.”

Judge Carnes disagreed. To be “provided for,” she said, the plan “must, in some way, affect or govern the debtor’s repayment.”

Although the issue has not percolated to the courts of appeals, Judge Carnes cited three lower court decisions that she characterized as saying that “a plan’s mere statement that payments on a debt will be made outside of the plan does not mean that debt is ‘provided for’ by the plan.”

Judge Carnes buttressed her conclusion by citing Rake v. Wade, 508 U.S. 464 (1993), where the Supreme Court interpreted “provided for” as it appears in Section 1325(a)(5). In Rake, the high court said that “provided for” means “to ‘make a provision for’ or ‘stipulate to’ something in the plan.” Id. at 473.

Because the plan made no provision for the mortgage, Judge Carnes said it was not “provided for,” meaning that the deficiency claim was not discharged.

Even if the mere mention of the mortgage meant it was “provided for,” Judge Carnes ruled that discharging the deficiency claim would violate the antimodification provision in Section 1322(b)(2), which prohibits a chapter 13 plan from modifying a claim secured only by the debtor’s principal residence.

In essence, depriving the mortgagee of the ability “to pursue in personam liability against [the debtor] . . . would necessarily modify the [mortgagee’s] rights because it strips the [lender] of a right provided by the original loan instruments,” Judge Carnes said.

Finally, the debtor argued that the unsecured deficiency claim was discharged because the lender did not file a proof of claim.

The debtor waived the argument, Judge Carnes said, because she raised it for the first time on appeal.

“Even if we were to consider this,” Judge Carnes said, “the merits favor” the lender.

Even without a proof of claim, Judge Carnes said, the deficiency liability “passed through bankruptcy unaffected” because it was “nondischargeable under the antimodification provision.”

The Implications of the Decision

Being “provided for” in the plan, or not, has another significance: A debtor is entitled to a chapter 13 discharge under the first phrase in Section 1328(a) after completing “all payments under the plan.” As we said earlier, the lower courts are split on whether defaulting on direct mortgage payments deprives a debtor of a general chapter 13 discharge, even if the debtor has spent five years religiously making all other payments through the trustee.

It is not a foregone conclusion that Judge Carnes’ opinion interpreting “provided for” in the last phrase of Section 1328(a) also governs “payments under the plan” appearing in the first phrase of the section. Does the subtle difference in language convey an entirely different meaning?

Judge Carnes did not miss the issue. In footnote 8, she appeared to say that the debtor would not have been entitled to a discharge under the first phrase in the section if the direct payments were under the plan.

Although the decision is not controlling, the opinion by Judges Carnes should carry weight in the Eleventh Circuit (and perhaps elsewhere) when a debtor wants a general chapter 13 discharge despite having defaulted on direct mortgage payments.

The Concurring Opinion

Circuit Judge Jill Pryor concurred in the judgment, but her separate opinion undercuts the majority’s analysis on “provided for by the plan” that would be helpful for a debtor seeking a general discharge after defaulting on direct mortgage payments.

Judge Pryor agreed with the majority’s alternative holding that the antimodification provision in Section 1322(b)(2) by itself bars the debtor from discharging a deficiency judgment.

Judge Pryor said she would have affirmed on that basis alone and would not have reached the question of whether the mortgage was “provided for by the plan.”