A local rule that requires mortgage payments to be made through the chapter 13 trustee is a valid exercise of the district’s rule-making power, according to Chief Bankruptcy Judge Stephani W. Humrickhouse of Raleigh, N.C.
The 8% commission it costs a chapter 13 debtor as a consequence of so-called conduit mortgage payments “is entirely reasonable in light of the services rendered by the trustee for the benefit of the debtor,” Judge Humrickhouse said.
The debtor had gross income of about $25,000 a year and proposed a plan only calling for payments on his home mortgage, a small lien on the house, and a lien on his car. Unsecured creditors would receive no payments under the plan. At filing, there were arrears on the mortgage.
Although the debtor’s applicable commitment period was three years, he elected to have a five-year plan.
A local rule requires making home mortgage payments through the chapter 13 trustee but permits a debtor to be excused from compliance at the trustee’s discretion or by order of the court. The debtor filed a motion to allow payments directly to the mortgage lender.
Judge Humrickhouse denied the motion in her Aug. 28 opinion.
The debtor challenged the validity of the local rule. Citing Sections 1321, 1322(a)(1), and 1326(e), Judge Humrickhouse upheld the validity of the local rule, saying it “clearly comports with the chapter 13 procedure contemplated by the Bankruptcy Code.” She said the Code “creates a presumption that the chapter 13 trustee will serve as the disbursing agent during the pendency of the debtor’s plan.”
Regarding the exercise of discretion to allow direct mortgage payments, the debtor complained that the trustee’s 8% commission would cost him almost $5,300 over the life of the plan.
Judge Humrickhouse conceded that the commissions would “impose added expense on” the debtor. However, she said, the debtor “will receive several benefits from the trustee,” including the monitoring of his mortgage’s account status and the ability to determine the outstanding balance at the conclusion of the plan.
Requiring the debtor to amend the plan and provide for conduit mortgage payments, Judge Humrickhouse said that the 8% commission “is entirely reasonable in light of the services rendered by the trustee for the benefit of the debtor.” Noting that the trustee system is “funded entirely by commissions,” she said that excusing a debtor from compliance with the local rule would be “inappropriate.”
Judge Humrickhouse said that the trustee will ordinarily permit the continuation of direct mortgage payments if the debtor has never been late.