Editor's Note: Part I was published in the May 2006 issue of the
ABI Journal.
Part II examines the legality of a mortgage creditor's attempts at post-closing collection
of mortgage-related fees and charges incurred during the pendency of a chapter
13 plan by focusing on (1) the anti-modification provisions for chapter 13 home
mortgages, (2) the reasons why mortgage creditors are prohibited from collecting
post-confirmation mortgage-related fees and charges during the chapter 13 plan
and (3) the applicability of the automatic stay and discharge injunction to
the post-petition activity of a mortgage creditor.
To understand the legality of post-confirmation fees and charges assessed by
the mortgage creditor, it is helpful to understand how those fees and charges
arise. For example, the mortgage creditor of the Winfrees—whose case was
detailed in Part I—demanded an additional $967 representing the costs
of broker price opinions, recordation fees and attorney's fees, which were purportedly
authorized by the underlying note and/or deed of trust. These fees and charges
arose notwithstanding the fact that the Winfrees arranged to have both the arrearage
on their mortgage and the payment on the long-term mortgage debt paid by the
chapter 13 trustee's office. To the extent that post-confirmation fees and charges
are not paid through the plan, those fees and charges become part of the creditor's
secured claim against the underlying property. Fees and charges can occur in
other ways too. As stated by Judge Lundin:
<blockquote>
Post-confirmation late charges, escrow account shortfalls, force-written
insurance premiums and other contract charges that accrue under a mortgage
during a chapter 13 case don't go away at discharge. When the debtor gets
a notice of foreclosure almost simultaneously with the discharge, counsel
has a tough task to explain why the years of hard work in the chapter 13 case
did not produce the advertised relief.2 
</blockquote>

Thus, after a case is closed, a debtor may be confronted with renewed threats
of foreclosure unless the accrued charges and fees—which are now declared
to be due—are paid.
Anti-Modification of Home Mortgages
One reason why mortgage-related fees and charges accrue during the pendency
of a chapter 13 plan is that Congress prohibits chapter 13 debtors from modifying
the terms of the underlying loan documents.3 Also, while a chapter 13 discharge
ordinarily eliminates any personal liability on debts, a debtor does not obtain
a discharge on long-term mortgage debts that continue beyond the length of the
plan;4 thus, even though an arrearage may be cured, the secured lien passes
through the bankruptcy unaffected,5 and the debtor retains personal liability
on the note after discharge. Although Congress has tempered the meaning of what
it means to modify a home mortgage in other contexts,6 nothing in the Bankruptcy
Code allows a debtor to eliminate the right of a mortgage creditor to assess
fees and charges authorized by state law and the underlying loan documents.
Therefore, when a creditor is secured by a chapter 13 debtor's principal residence,
any contractual right to assess fees, charges or expenses remains viable against
the underlying property even after the chapter 13 discharge is entered.7

Prohibition on Collection During the Pendency of Plan
While the chapter 13 case is active, the automatic stay prohibits "any
act to...enforce any lien against property of the estate."8 What constitutes
post-confirmation property of the estate can vary significantly from jurisdiction
to jurisdiction. In short, a four-way split exists—each stemming from
a different interpretation of §§1306 and 1327(b) of the Code. The
four different interpretations may be dubbed "estate termination,"9
"estate preservation,"10 "plan essential,"11 and "empty
out and fill up."12 The continuing applicability of the automatic stay
to property of the bankruptcy estate depends on what interpretation a particular
jurisdiction has adopted. Many jurisdictions solve the problem by adopting a
standing order of confirmation for chapter 13 plans. For example, the standard
order of confirmation for the Middle District of North Carolina specifically
provides that property of the estate remains property of the estate after confirmation
of the plan; thus, the automatic stay remains in effect after confirmation until
it is otherwise terminated.13 In contrast, when the confirmed plan calls for
property of the estate to vest in the debtor on confirmation, no applicable
subsection of §362(a) applies to post-confirmation defaults, and the automatic
stay does not prevent a mortgage creditor from seeking to collect payment to
cure the default.14

Whatever interpretation a jurisdiction has adopted, a mortgage creditor cannot
seek to collect its post-confirmation fees and charges from the underlying property
so long as that property remains property of the estate. The only way for the
mortgage creditor to collect the mortgage fees and charges is to seek relief
from the automatic stay, pay the required fee and convince the court that it
should be allowed to foreclose on the property unless its fees and charges are
paid. Absent exceptional circumstances, the chances of success are not favorable
because a debtor's principal residence is deemed essential to a successful reorganization
plan.15 Also, a chapter 13 case is often filed to preserve equity in the property,
which is presumably increasing as the debtor makes timely plan payments and
thereby providing a form of adequate protection to the mortgage creditor.16
Moreover, the bankruptcy court may deny relief from the automatic stay and allow
the debtor to pay the accrued assessment through adequate protection payments
while the property is under the protection of the automatic stay.
Inapplicability of the Automatic Stay and Discharge Injunction to Post-Confirmation
Fees and Charges
Chapter 13 debtors generally attack post-closing demands of a creditor for
post-confirmation fees and charges by alleging violations of the discharge injunction
and the automatic stay. This section explains why neither is generally applicable.
The automatic stay prevents the mortgage creditor from collecting on assessed
mortgage fees and charges during the pendency of the chapter 13 plan—or
at least so long as the real property remains property of the estate. The mere
assessment of a post-confirmation fee or charge, however, without any effort
to collect it from the debtor or property of the estate, does not violate the
automatic stay.17 Accordingly, while a fee or charge may be assessed on the
internal books of the mortgage creditor, it cannot be collected from property
of the estate—or the debtor—without first obtaining relief from
the automatic stay. When property of the estate continues after confirmation
then, by operation of law the automatic stay terminates as to the debtor when
the debtor receives a discharge and as to the estate when the case is closed.18
Therefore, when a mortgage creditor makes a post-closing demand for assessments
that accrued post-confirmation, the protection afforded by the automatic stay
is not applicable.

Likewise, the discharge injunction is not applicable to post-confirmation assessments.
A post-confirmation assessment is not encompassed within the discharge injunction
because a post-confirmation debt is not provided for in the plan and is not
an allowed claim in the bankruptcy case.19 Furthermore, §1328(a)(1) expressly
states that a chapter 13 discharge is not applicable to any debt provided for
under §1322(b)(5), which allows for the cure of a home mortgage arrearage.20
In addition, §524(j) of the Code expressly states that the discharge injunction
is not applicable to creditors holding a security interest in a debtor's principal
residence if the act of the creditor is undertaken in the ordinary course of
business and if the "act is limited to seeking or obtaining periodic payments
associated with a valid security interest in lieu of in rem relief to enforce
the lien."21
Therefore, neither the right to bring a civil contempt action for a violation
of the discharge injunction nor the private right of action created by the automatic
stay will provide any relief to a debtor seeking to eliminate a creditor's assessment
of mortgage fees and charges incurred during the pendency of the chapter 13
plan—i.e., post-confirmation—when the mortgage creditor does
not undertake any act to collect the assessed fee or charge from property of
the estate. Unless a debtor can assert some other cause of action sufficient
to invoke bankruptcy court jurisdiction, the debtor is limited to asserting
non-bankruptcy causes of action in either state or federal court regarding the
propriety of the assessment or collection of those fees and charges.
<blockquote> </blockquote>

<hr>
<h3>Footnotes</h3>

1 The views expressed in this article are solely those of the author. 
2 Lundin, Keith M., 2 Chapter 13 Bankruptcy §131.1 (3d ed. 2004).
3 11 U.S.C. §1322(b)(2). See, e.g., Dewsnup v. Timm,
502 U.S. 410, 420 (1992) (stating that a creditor's valid liens will survive
bankruptcy unaffected unless the Bankruptcy Code clearly permits modification).

4 11 U.S.C. §§1322(b)(5), 1328(a)(1) and (c)(1). 
5 Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991) ("Ordinarily,
liens and other secured interests survive bankruptcy"). 
6 See 11 U.S.C. §§1322(b)(5), (c). 
7 See, e.g., Altegra Credit Co. v. Dennis (In re Dennis),
286 B.R. 793, 796 (Bankr. W.D. Okla. 2002) ("'At best, defendant's plan
provision resulted in the discharge of her personal liability to plaintiff in
the event she completes the payments called for under her plan. The plan provision
in question did absolutely nothing to affect defendant's lien on her home'")
(citation omitted).

8 §362(a)(4). See, also, §362(c)(1) ("[T]he stay of an
act against property of the estate under subsection (a) of this section continues
until such property is no longer property of the estate..."); In re
Lawson, No. 04-20441, 2004 Bankr. LEXIS 740 at *5 (Bankr. E.D. Ky. May 28,
2004) ("[T]he automatic stay's protection of property of the debtor expires
upon the granting of a discharge... However, the automatic stay also protects
property of the estate, and that protection does not expire until the property
is no longer property of the estate..."). 
9 The "estate termination" approach to interpreting the relationship
between §§1306 and 1327(b) is based on the premise that all the property
of the estate vests in the debtor at confirmation and there is no more "property
of the estate" after that time. See, e.g., In re Petruccelli,
113 B.R. 5, 15-17 (Bankr. S.D. Cal. 1990) (concluding that the automatic stay
did not apply to a post-petition levy of a bank account holding the debtor's
earnings because the debtor's plan did not postpone revesting under §1327(b)
and those funds were not property of the estate after confirmation). The estate
termination approach favors post-petition creditors because debtors may dispose
of and encumber their property as they see fit, and post-petition creditors
may go after that property without running afoul of the automatic stay. Petruccelli,
113 B.R. at 17; In re Dickey, 64 B.R. 3, 4 (Bankr. E.D. Va. 1985). 
10 The "estate preservation" approach to interpreting the relationship
between §§1306 and 1327(b) is based on the premise that the property
"vesting" in the debtor at confirmation does not limit the extent
to which that property is also property of the estate. See, e.g.,
Annese v. Kolenda (In re Kolenda), 212 B.R. 851 (W.D. Mich. 1997)
(affirming an order of the bankruptcy court assessing damages for violation
of the automatic stay when the debtor had purchased an automobile one year after
confirmation, later borrowed money against that automobile and when the creditor
repossessed the automobile post-petition without first seeking relief from the
automatic stay). The "estate preservation" approach favors pre-petition
creditors by limiting the assets, if any, that a post-petition creditor may
seize in satisfaction of a post-petition debt without obtaining relief from
the automatic stay.

11 The "plan essential" approach takes the position that after confirmation,
only plan-essential property remains in the estate, including that part of post-confirmation
earnings necessary to fund the plan. See, e.g., Security Bank
of Marshalltown v. Neiman, 1 F.3d 687, 691 (8th Cir. 1993) (stating that
property and future earnings of the debtor necessary for fulfillment of the
chapter 13 plan remain property of the estate after confirmation notwithstanding
vesting of property in the debtor under §1327(b)); In re Ziegler,
136 B.R. 497, 500 (Bankr. N.D. Ill. 1992). 
12 The "empty out and fill up" interpretation of §§1306
and 1327(b) is self-explanatory. Property of the estate vests in the debtor
on confirmation, all property of the estate is emptied out, and then the estate
fills back up again with the debtor's post-confirmation earnings and other property
consistent with §§541 and 1306. See, e.g., United
States v. Holden, 258 B.R. 323 (D. Vt. 2000).

13 11 U.S.C. §§362(c), 1306(a) and 1327(b). 
14 See, e.g., In re Petruccelli, 113 B.R. 5, 15-17 (Bankr.
S.D. Cal. 1990) (concluding that the automatic stay did not apply to a post-petition
levy of a bank account holding the debtor's earnings because the debtor's plan
did not postpone revesting under §1327(b) and those funds were not property
of the estate after confirmation). 
15 See, e.g., In re Raymond, 99 B.R. 819, 823 (Bankr.
S.D. Ohio 1989) ("the court concludes that debtors' irregular payment history
over approximately the last four months does not, as a matter of law, constitute
cause for relief from stay"); In re Elmore, 94 B.R. 670, 677 (Bankr.
C.D. Cal. 1988) ("a debtor's principal residence in a chapter 13 case is
virtually always necessary to an effective reorganization").

16 An equity cushion by itself may be adequate protection to a creditor and
reason to deny a motion for relief from the automatic stay. See, e.g.,
Orix Credit Alliance v. Delta Resources (In re Delta Resources),
54 F.3d 722, 730 (11th Cir. 1995) (recognizing that an equity cushion affords
a secured creditor adequate protection and that the creditor is not entitled
to the preservation of the equity cushion ratio inasmuch as "an oversecured
creditor's interest in property which must be adequately protected encompasses
the decline in the value of the collateral only, rather than perpetuating the
ratio of the collateral to the debt"), cert. denied, 516 U.S. 980 (1995)
; Pistole v. Mellor (In re Mellor), 734 F.2d 1396, 1400 (9th Cir.
1984) (finding that the equity cushion standing alone can provide evidence of
adequate protection). 
17 11 U.S.C. §362(a); Mann v. Chase Manhattan Mortg. Corp., 316
F.3d 1, 3 (1st Cir. 2003) ("these post-petition bookkeeping entries by
Chase did not implicate Bankruptcy Code §362(a)(3), since such unilateral
accruals of amounts assertedly due, but in no manner communicated to the debtor,
the debtor's other creditors, the bankruptcy court nor any third party plainly
are not the sort of 'act' Congress sought to proscribe"); Gutling v.
Household Financial Services, 312 B.R. 699, 703-04 (Bankr. M.D. Fla. 2004)
(holding that there was no violation of the automatic stay when the creditor
simply made entries on its internal records that were never communicated to
the debtor or otherwise had any effect on the debtor before a discharge was
entered); 3 Collier on Bankruptcy |362.03[3][c] (Alan N. Resnick and
Henry J. Sommer eds. 15th ed. rev. 2005) ("actions on claims that arise
after the commencement of the case are not stayed... However, enforcement of
a judgment on a post-petition claim is typically stayed"); cf. Stark
v. Crestar Mortg. Corp. (In re Stark), 242 B.R. 866, 872 (W.D.N.C.
1999) ("since Crestar attempted to collect these 'inspection or bankruptcy
monitoring fees' from the debtors while the stay was in effect, by adding the
fees to the debtors' monthly statements Crestar violated §362(a)(3)").

18 11 U.S.C. §362(c)(2) ("the stay of any other act...continues until
the earlier of—(A) the time the case is closed...(C) if the case is a
case under chapter...13...the time a discharge is granted or denied");
Henneghan v. Columbia Gas of Va., Inc. (In re Henneghan), No.
05-1220, 2005 Bankr. LEXIS 1770 at *12 (Bankr. E.D. Va. June 22, 2005) ("the
automatic stay expires (except as to property of the estate) when the debtor
is granted or denied a discharge"); In re Lawson, No. 04-20441,
2004 Bankr. LEXIS 740 at *5 (Bankr. E.D. Ky. May 28, 2004) ("the automatic
stay's protection of property of the debtor expires upon the granting of a discharge...
However, the automatic stay also protects property of the estate, and that protection
does not expire until the property is no longer property of the estate...");
In re Kasper, 309 B.R. 82, 99 n.27 (Bankr. D.C. 2004) ("The debtor's
discharge terminates the automatic stay with respect to acts against the property
of the debtor...and the automatic stay as to the property of the estate property
ceases upon the property becoming property of the debtor..."). 
19 11 U.S.C. §502. See, e.g., Joubert v. ABN Mortg. Group
Inc. (In re Joubert), No. 04-1373, 2005 U.S. App. LEXIS 11424 at
*6 (3d Cir. June 16, 2005) ("Joubert alleges that the contested attorney
fees were first disclosed in the interim between confirmation and discharge.
Therefore, Joubert could not challenge the reasonableness of the $500 charge
before the bankruptcy court at the time of the chapter 13 plan confirmation,
nor was there a discharge in place to violate when she first learned of the
charge, so §524 was not implicated"); Telfair v. First Union Mortgage
Corp. (In re Telfair), 224 B.R. 243, 248 (Bankr. S.D. Ga. 1998) ("as
the discharge does not affect the [post-confirmation] debt due First Union,
the discharge injunction of §524 has no application"), aff'd., 216
F.3d 1333 (11th Cir. 2000). 20 11 U.S.C. §1328(a)(1); In re Chappell,
984 F.2d 775, 780 (7th Cir. 1993) (explaining that a creditor's lien remains
intact and survives discharge notwithstanding the treatment of an arrearage
claim under §1322(b)(5)). 21 11 U.S.C. §524(j).

Journal Authors

Ryan Winquist Johnson

Journal Date

Thursday, June 1, 2006 - 12:00

Bankruptcy Rule