Chapter 13 Who Pays the Mortgage

Journal Issue

Jun 2001

Column Name

Journal HTML Content

It should be uncontroversial that two major goals of chapter 13 are to repay
creditors as much as the debtor reasonably can and, when this is accomplished, to
grant the debtor the benefits of a chapter 13 discharge.<a href="#2" name="2a">2</a> It should also be
uncontroversial that any feature of chapter 13 plan administration that demonstrably
advances these goals without violating the Code, Rules, ethical standards or
cost-benefit precepts is worthy of consideration as part of any program of bankruptcy
administration.

There are a number of administrative features of chapter 13 that deserve to be
tested for their success in meeting this strict standard for national adoption. Among
them is the practice of requiring debtors to pay non-delinquent ("ongoing") mortgage
payments through the trustee ("through the plan") in cases where the trustee is also
curing the accumulated pre-petition mortgage arrears.<a href="#3" name="3a">3</a> This practice has been endorsed
in the major treatise on chapter 13.<a href="#4" name="4a">4</a> It has also been the subject of case law
and a brief empirical test in one judicial district.<a href="#5" name="5a">5</a>

This article presents our first effort to put the practice into a national
perspective by identifying its locations among the corps of approximately 175 standing
trustees and inquiring whether the practice is related to beneficial case outcomes. Our
aspiration would be to assess the costs and benefits of this trustee practice in light
of the goals of chapter 13. We face two major hurdles, however. First, this is
a remarkably complicated problem because of the many variables affecting the costs and
effectiveness of a standing trustee operation. Second, gaining consensus on the
concept of success in chapter 13 is a difficult task. Like beauty, success lies
in the eye of the beholder—including the eye of the beholden. Further, the interests
of mortgagees and other creditors may be affected differentially by the details of the
trustees' practices regarding ongoing mortgage payments. Our purpose here must therefore
remain quite modest—to cast a little light on the practice in the hope that others
might reflect on the practices prevailing in their own localities.

The comparisons here are based on information in the 1999 annual reports submitted
by 175 standing trustees to the Executive Office of the U.S. Trustee, supplemented
by additional inquiries made through the regional U.S. Trustee offices.<a href="#6" name="6a">6</a>

As shown in Table 1, in 1999 one-third (58/175) of the standing
trustees were making ongoing mortgage payments for at least some of their cases. These
trustees were practicing in two-thirds of the federal circuits (excluded were circuits
D.C., 1st, 2nd and 10th) and 31 districts within 18 states. The practice
was most concentrated in a band running north to south through the mideast part of
the country, including trustee operations in Illinois, Indiana, Kentucky, Michigan,
Ohio and Tennessee. Other areas of density included districts in Florida and
Washington.

With only a few of exceptions, both forms of practice could be found within the
same circuit and state, and in some instances, within the same district. Some
trustees will plan for direct debtor payments in some cases and payments through the
trustee in others. The administrative procedures supporting the mortgage payments also
varied among the 58 trustee operations.<a href="#7" name="7a">7</a> As measured by the costs of the trustee
operations as a percentage of their disbursements, the groups did not appear to differ
meaningfully from each other.<a href="#8" name="8a">8</a>

<h3>The Relationship to Percentage of Completed Cases</h3>

One plausible benefit of moving the mortgage payments through the trustee operation
is to increase the likelihood that the debtor will successfully complete the plan. The
risks of default should be reduced, assuming the debtor remains regularly employed for
the plan's duration.<a href="#9" name="9a">9</a>

A thorough and valid test of this benefit would require following cohorts of
equivalent cases forward from filing through termination, assigning some to direct payment
by the debtor and the rest to payment through the trustee. Short of this degree of
empirical rigor, we can try to find approximate tests that give us some idea of the
extent to which the practice is beneficial. We are just beginning to understand how
to do this, and in particular how to avoid making errors of inference arising from
the many factors that can confound our understanding of what works and what doesn't.

We can compare the percentages of terminated cases within a year that were
successfully completed in trustee operations that paid the ongoing mortgage versus those
in which the debtor made payments directly. We recognize and emphasize that this not
an ideal measure for a number of reasons—but it is a place to begin. If no
difference is found at this relatively crude level, it may be that there is in fact
no difference between the practices in supporting plan completion; alternatively, the
difference may be obscured by factors not controlled in our comparison.

The comparison in Table 2 does not support the conclusion that moving the ongoing
mortgage payments through the trustee operation increases the rate of successful
terminations. When we subdivide the group of 58 into smaller groups based on
administrative differences between them, the result does not change markedly: The
proportion of successful terminations remains approximately 30 percent. The essential
identity within each group of arithmetic average and median values shows that the tails
of the distribution (extreme percentages) did not influence the average.

This finding is merely a snapshot of a single year's activity; it needs to be
supplemented with more dynamic work that tracks cases over their lifetimes. One example
of this approach was summarized in a paper by Bankruptcy Judge Michael S. McManus
(E.D. Calif.) and standing trustee Michael H. Meyer, who changed the local
practice in Modesto, Calif., for a period of time in the mid-1990s to pay the
mortgage through the plan. On the basis of their experiences, they concluded: "The
bottom line appears to be that requiring payment of post-petition mortgage installments
through the plan makes it more likely that chapter 13 cases will remain pending and
ultimately be concluded."<a href="#10" name="10a">10</a> The authors discontinued the practice, however, believing
that the costs were greater than the trustee operation could bear in the long run.

<h3>Conclusion</h3>

As with everything else that is interesting about chapter 13, this practice has
its enthusiastic proponents and equally committed detractors. Of course it is always
embedded in the context of all the other features of the local bankruptcy
environment: the financial profiles of typical debtors, expectations for percentages
to be repaid to unsecured creditors, budget details, standards of feasibility, numbers
of repeat filers and so on. There is no way to intuit or declare by fiat what the
most cost-effective practices are. Those answers can only come through more detailed
observations and studies.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> All views expressed in this article are those of the authors and do not necessarily represent the views of the Executive Office
for U.S. Trustees or the Department of Justice. <a href="#1a">Return to article</a>

<a name="2">2</a> "By the second week of a basic course in bankruptcy, almost any law student can recite in his or her sleep the two competing
goals of consumer bankruptcy: a 'fresh start' for debtors and equality of distributions for creditors. The two phrases are the twin stars of
consumer bankruptcy, reflecting the need for relief and the need for fairness, the balanced objectives of the system." Warren, Elizabeth,
A., "Principled Approach to Consumer Bankruptcy," 71 Amer. Bankr. L.J. 483 (1997). <a href="#2a">Return to article</a>

<a name="3">3</a> We do not address, nor have information about, instances in which the debtor may be required to pay non-delinquent mortgage payments
when there are no arrears. <a href="#3a">Return to article</a>

<a name="4">4</a> Lundin, Keith M., Chapter 13 Bankruptcy: Second Ed. Vol.1, §4.22 (1991; 1996 supplement). <a href="#4a">Return to article</a>

<a name="5">5</a> See, e.g., <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… v. Heitkamp, 670 F.2d 478 (5th Cir. 1982)</a> (chapter 13 permits a debtor to act as a
disbursing agent in making current mortgage payments); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Aberegg, 961 F.2d 1307, 1310 (7th Cir. 1992)</a> ("It would
serve little purpose to require the debtors to disburse their mortgage payments through the trustee..."); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Reid, 179 B.R. 504
(E.D. Texas 1995)</a> (decision about who will make disbursements is in the court's discretion); <a href="http://www.westlaw.com/find/default.asp?rs=CLWP2.1&vr=1.0&cite=… re Burkhart, 94 B.R. 724
(N.D. Fla. 1988)</a> (same); McManus, Michael S. and Meyer, Michael H., Payment of Post-Petition Mortgage Installments Through
the Chapter 13 Plan, presented to the Central California Bankruptcy Association, September 2000. <a href="#5a">Return to article</a>

<a name="6">6</a> We thank the U.S. Trustee Program's standing trustee coordinators and Debra Finan of the Executive Office Division of Review
and Oversight for their help. <a href="#6a">Return to article</a>

<a name="7">7</a> There are two forms of practice: pay the mortgage without assessing a fee on it, or assess the standard fee for trustee operations. <a href="#7a">Return to article</a>

<a name="8">8</a> The median percentage of expense to receipts was approximately 6 percent for both groups. There are economies of scale in chapter
13 trustee operations. Because there were both very large and very small trustee operations in both groups, the costs of operations in both
groups ranged from very small (approximately 3 percent of disbursements) to the maximum allowed (10 percent). Closer analysis might reveal
useful differences within and between the two groups. <a href="#8a">Return to article</a>

<a name="9">9</a> The practice is further strengthened if combined with the use of wage orders. We recognize that there are often additional issues
to be considered in respect to imposing wage orders in chapter 13 plans, but the principle remains valid. <a href="#9a">Return to article</a>

<a name="10">10</a> McManus and Meyer, supra n. 4 at 12.

Journal Authors

Edward M. Flynn

Gordon Bermant

Journal Date

Friday, June 1, 2001 - 12:00

Bankruptcy Rule

2001