Although two chapter 13 debtors had defaulted on their direct-pay mortgages, Bankruptcy Judge Alan S. Trust of Central Islip, N.Y., found reasons why both were still entitled to discharges.
In the two cases, the debtors had confirmed chapter 13 plans where the trustee would make the payments required to cure prepetition mortgage defaults and the debtors themselves would make current payments directly to the lenders. Although the debtors made all other payments required by their plans, both had mortgage payment defaults near the end of their plan payment periods.
The cases raised the question of whether the debtors were not entitled to discharges because they had defaulted on their direct-pay mortgages although they had made all other payments to their trustees as required by their plans.
The cases turned on Section 1328(a), which requires the court to enter a discharge “after completion of all payments under the plan.” Does “payments under the plan” only refer to payments made by the trustee, or does the term include payments that debtors undertake to make directly to mortgagees?
In his June 15 opinion, Judge Trust agreed with a non-precedential opinion from the Fifth Circuit and other courts holding that defaults on direct-pay mortgages can result in denial of discharge. However, some of those courts only deny discharge if prepetition arrearages were paid through the trustee.
Judge Trust offered two cogent reasons for denying discharge when debtors default on direct-pay mortgages. First, he said that the debtors would have calculated their plan payments based on deductions for mortgage payments they did not make. In other words, he said they “are essentially claiming a deduction to which they are not entitled.”
Second, he said that a direct-pay debtor should not receive a discharge when a similarly situated debtor would not receive a discharge in a district requiring all mortgage payments to be made through the trustee.
In the first of the two cases, the trustee had issued a certification of completion of plan payments, not knowing that the debtor was in default on the direct-pay mortgage. The lender filed an Official Form 4100R alleging a deficiency on the mortgage payments. The lender also filed a motion for relief from the automatic stay.
As a matter of routine, the court entered an order granting a discharge before the lift-stay motion came on for hearing. Judge Trust then issued an order directing the debtor to show cause why the discharge should not be revoked.
Judge Trust found no grounds for revoking a discharge, under either Section 1328(e) or Rule 60(b)(1).
Under Section 1328(e), the debtor committed no fraud, one of the two elements required for revoking discharge, because the debtor filed nothing with the bankruptcy court claiming that all plan payments had been made.
Rule 60(b)(1) also could not be invoked, Judge Trust said, because there was no published opinion in the district barring discharge for failure to make direct mortgage payments. Likewise, there was no opinion in the district saying that a court should not grant a discharge after a mortgagee files a Rule 3002(g) statement.
To the contrary, he said, the court issued the discharge “as it routinely had,” thus obviating the use of Rule 60(b)(1) to correct a mistake.
In the second case, the lender filed a lift-stay motion following the debtors’ default on their direct-pay mortgage. Five months after the court lifted the stay, and within a week of the conclusion of their five-year plan, the debtors filed a motion to modify the plan by surrendering the property and excepting the debt on the mortgage from discharge.
No one objected to the plan modification.
Because the plan modification was “barely” filed within the time limitation contained in Section 1323(b)(1)(B), and since there were no objections to the modification, Judge Trust allowed modification of the plan and granted the discharges, because “it had been common practice in this district for chapter 13 debtors to receive a discharge even when they have failed to make direct mortgage payments.”