Bankruptcy judges in Illinois disagree on whether a chapter 13 debtor who fails to make all direct payments on a home mortgage is eligible for a discharge.
Adopting the minority approach, Bankruptcy Judge Thomas L. Perkins of Peoria, Ill., ruled in March that failure to make direct payments on a nondischargeable mortgage is not grounds for denying a chapter 13 discharge. To read ABI’s discussion of Judge Perkins’ opinion, In re Gibson, 582 B.R. 15 (Bankr. C.D. Ill. March 5, 2018), click here.
Chief Bankruptcy Judge Laura K. Grandy of East St. Louis, Ill., confronted a similar case where the confirmed chapter 13 plan called for the debtors to make direct payments to the home mortgage lender going forward. Payments through the trustee cured arrears.
At the end of the plan, the trustee filed a notice saying that the arrears had been cured and that the debtors had made all payments required to be made to the trustee. The debtors filed a motion for entry of discharge, stating they had made all payments required by the plan.
Fifteen days before the deadline for objecting to discharge, the mortgage lender filed a response to the trustee’s notice stating that the mortgage was in arrears by almost $71,000. The lender did not object to the entry of discharge, perhaps because the mortgage debt would not be discharged in any event under Sections 1322(b)(5) and 1328(a)(1).
Neither the chapter 13 trustee nor any creditor objected, so Judge Grandy entered the debtor’s discharge under Section 1328(a).
One month after the entry of discharge, the chapter 13 trustee filed a complaint to revoke discharge under Section 1328(e), alleging that the debtors had obtained their discharges by fraud. The debtors’ counsel argued that the motion for a discharge was accurate because direct payments allegedly were not “under the plan.”
Judge Grandy said in her August 28 opinion that she “respectfully” disagrees with Judge Perkins because she believes that direct payments to a mortgagee are “payments under the plan,” as required by Section 1328(a). Direct payments are “under the plan,” she said, because they “must be addressed in that plan.”
However, Judge Grandy did not revoke the debtors’ discharges. Because the lender’s response told the chapter 13 trustee in advance of discharge that the debtors had not made all payments, she allowed the discharge to stand under Section 1328(e) because the trustee knew about the alleged fraud before discharge.
Given the trustee’s tardy objection to discharge, Judge Grandy said it was unnecessary to decide “whether or not the debtors’ statement that they completed all plan payments was fraudulent.”
She ended her opinion with an admonition, saying it was “entirely possible that such statements may rise to the level of fraud.” Therefore, she said, debtors “are advised to carefully consider the accuracy and truthfulness of statements made in their motions for discharge.”