The debate continues on the right of a chapter 13 debtor to a discharge after missing direct payments to a home mortgage lender.
Bankruptcy Judge Susan D. Barrett of Augusta, Georgia, joined the minority by holding that a post-petition default on direct mortgage payments “standing alone does not constitute a material default” justifying dismissal under Section 1307(c)(6).
Before granting a discharge, Judge Barrett is still requiring her debtors to survive a good faith hearing and explain how they spent the money not paid to the lenders. Implicit in her September 30 opinion is the suggestion that the debtors cannot prove good faith if the money not paid to lenders would have increased the distribution to unsecured creditors.
Two Cases, Same Facts
Raising the same legal issue, the chapter 13 trustee filed motions to dismiss two chapter 13 cases.
The debtors had completed payments to the trustee under their confirmed chapter 13 plans. The plans had no dividends for unsecured creditors. One debtor was paying $745 a month for three years, and the other paid $310 a month for five years. Both plans cured prepetition defaults on the mortgages through payments from the trustee.
To avoid fees otherwise earned by the trustee, both plans called for the debtors to make post-petition mortgage payments directly to the mortgage lenders. After the debtors completed making all payments to the trustee, it turned out that the debtors were both some $47,000 in arrears in post-petition mortgage payments that should have been made directly to the lenders.
The chapter 13 trustee filed motions to dismiss under Section 1307(c)(6), contending that defaults on the mortgages were material defaults under the plan. Had Judge Barrett granted the motions, the debtors would have lost their discharges on top of the likely loss of their homes.
Section 1307(c)(6) provides that the court “may dismiss . . . for cause, including . . . [a] material default by the debtor with respect to a term of a confirmed plan.”
The Courts Are Split
Judge Barrett collected authorities supporting both the majority and minority points of view.
The pivotal statute is Section 1328(a), which provides that the court “shall grant the debtor a discharge of all debts provided for by the plan” after completing “all payments under the plan.”
She explained why the majority hold that “all payments under the plan” includes payments made directly to a mortgage lender.
Judge Barrett sided with the minority in ruling that “all payments under the plan” does not include direct mortgage payments. She said that a default on the mortgage, “standing alone[,] does not merit the dismissal of a debtor’s bankruptcy case, the denial of their discharges, and most likely the loss of their home.”
Judge Barrett laid out arguments on both sides. In support of the minority’s point of view, she relied upon the statutory language in Sections 1329(a) and 1325(b)(1)(B), along with Bankruptcy Rule 3002.1.
One of Judge Barrett’s more persuasive arguments was based on the 2005 amendment to Section 1328(a), requiring a debtor to certify that he or she is current on all domestic support obligations. But, the judge said, “Congress did not require a certification regarding direct loan payments.”
The statutory consequence for failing to make domestic support payments is loss of discharge. For failure to make mortgage payments, Judge Barrett said that the “proper statutory consequence . . . is potentially the loss of your home, not the denial of discharge.”
Another cogent argument by Judge Barrett derives from Bankruptcy Rule 3002.1, adopted in 2011 as additional protection for debtors. However, the rule has had the effect of bringing direct mortgage defaults to light for the first time. She cited a judge who surmised that he had previously granted discharges in “countless” cases where there had been mortgage defaults unknown to the trustee.
Judge Barrett recited the rule of statutory construction “that a statute is not to be read as eroding past practices absent a clear indication from Congress.”
Judge Barrett found support for her conclusion in Dukes v. Suncoast Credit Union (In re Dukes), 909 F.3d 1306 (11th Cir. Dec. 6, 2018), where a majority of the Eleventh Circuit panel held that direct payments by a chapter 13 debtor to a mortgagee are not “provided for by the plan” under Section 1328(a). Judge Barrett admitted that the circuit court was “not addressing the exact issue” in the cases before her. To read ABI’s discussion of Dukes, click here.
Good Faith Remains an Issue
In line with the holding of a minority of courts, Judge Barrett ruled that the failure to make direct mortgage payments “is not per se grounds for denial of discharge.” The debtors were not home free, though.
The trustee noted that debt service on the debtors’ mortgages was included in calculating payments to creditors. The trustee argued that the money withheld from the lenders “should have gone to the Debtors’ creditors.”
Although the debtors had not explained how they spent the money withheld from the lenders, they requested that Judge Barrett hold hearings “on their respective expenditures of these funds.”
Judge Barrett directed the clerk “to set a hearing on” the trustee’s motion to dismiss for lack of good faith where the debtors’ uses of the funds would evidently be the primary issue.
Observations
Courts on both sides of the issue make cogent arguments based on the language in several sections of the Bankruptcy Code. This writer submits that the answer therefore cannot be found in the plain language of the statute.
Assuming there is no answer in the statutory language alone, courts must face up to the task of deciding what the law ought to be, because Congress has not clearly said what it is. But perhaps Congress did suggest the answer in policies evident in the Bankruptcy Code. The question is, however, which of several policies in the Code is controlling when it comes to direct mortgage payments?
Judge Barrett may be barking up the right tree by focusing on good faith. What did the debtors do with the $47,000 they didn’t pay their lenders? Did they put the money in their pockets and live better, or did they use the money for unexpected expenses? Did the inability to pay the mortgages result from the loss of a job or illness?
Theoretically, debtors should return to court for an amended plan if circumstances change. But how much legal acuity should we demand from debtors? And can they afford to pay a lawyer for the legal footwork?
Perhaps evaluating a debtor’s decisions with the benefit of hindsight is a better answer than laying down a bright-line rule.
The debate continues on the right of a chapter 13 debtor to a discharge after missing direct payments to a home mortgage lender.
Bankruptcy Judge Susan D. Barrett of Augusta, Georgia, joined the minority by holding that a post-petition default on direct mortgage payments “standing alone does not constitute a material default” justifying dismissal under Section 1307(c)(6).
Before granting a discharge, Judge Barrett is still requiring her debtors to survive a good faith hearing and explain how they spent the money not paid to the lenders. Implicit in her September 30 opinion is the suggestion that the debtors cannot prove good faith if the money not paid to lenders would have increased the distribution to unsecured creditors.
Raising the same legal issue, the chapter 13 trustee filed motions to dismiss two chapter 13 cases.
The debtors had completed payments to the trustee under their confirmed chapter 13 plans. The plans had no dividends for unsecured creditors. One debtor was paying $745 a month for three years, and the other paid $310 a month for five years. Both plans cured prepetition defaults on the mortgages through payments from the trustee.
To avoid fees otherwise earned by the trustee, both plans called for the debtors to make post-petition mortgage payments directly to the mortgage lenders. After the debtors completed making all payments to the trustee, it turned out that the debtors were both some $47,000 in arrears in post-petition mortgage payments that should have been made directly to the lenders.
The chapter 13 trustee filed motions to dismiss under Section 1307(c)(6), contending that defaults on the mortgages were material defaults under the plan. Had Judge Barrett granted the motions, the debtors would have lost their discharges on top of the likely loss of their homes.
Section 1307(c)(6) provides that the court “may dismiss . . . for cause, including . . . [a] material default by the debtor with respect to a term of a confirmed plan.”