Splitting with the Third and Seventh Circuits, the Tenth Circuit held that a chapter 13 debtor cannot cure a post-confirmation default on a mortgage after the five-year plan has expired. In other words, the appeals court believes that a belated payment would be an impermissible modification of the plan after the term of the plan has ended.
Even though the debtor had tendered cure payments, the appeals court upheld dismissal of the case, with the effect of denying the debtor’s discharge, although she had made all plan payments to the chapter 13 trustee.
The Accident and the Default
In 2014, the debtor confirmed her chapter 13 plan, with monthly mortgage payments going directly to the lender. She was current on the mortgage at filing and remained current until she had an auto accident in 2018. With additional expenses after the accident, the debtor missed two mortgage payments “in the final months of her five-year plan,” Circuit Judge Robert E. Bacharach said in his July 23 opinion for himself and Circuit Judge David M. Ebel.
Parenthetically, Judge Bacharach said the debtor missed two more mortgage payments after the plan was over.
Following the conclusion of the plan, the bank filed a motion to dismiss. The debtor opposed the motion, tendered the defaulted payments and proposed that she be granted a discharge after paying the arrears.
Although not mentioned in Judge Bacharach’s opinion, the debtor evidently did not file a motion asking for a hardship discharge under Section 1328(b).
Bankruptcy Judge Elizabeth E. Brown of Denver granted the motion to dismiss and denied a motion for reconsideration. The Tenth Circuit granted a direct appeal, overstepping an intermediate appeal to the district court or the Bankruptcy Appellate Panel.
A Cure or a Plan Modification?
Judge Bacharach stated the question as follows: Were the tendered payments a permissible cure or an impermissible attempt to modify the plan after the term of the plan had ended?
More precisely, Judge Bacharach asked whether the proffered cure would be a payment made “under the plan,” therefore entitling the debtor to a discharge under Section 1328(a). That section provides that the court “shall” grant a discharge “after completion by the debtor of all payments under the plan.” Of course, the debtor contended that cure payments would be made “under the plan.”
The bank argued, successfully, that the proffered payments were not a cure but were an impermissible modification of the plan after the five-year term of the plan had ended.
What Does ‘Under the Plan’ Mean?
Judge Bacharach said that the courts differ on the meaning of “after completion by the debtor of all payments under the plan.” He cited a string of cases holding that untimely payments are allowable, while “many other courts” believe that late payments are not made “under the plan.”
While the lower courts are split on whether late payments are permissible, the Third and Seventh Circuits have found discretion to allow a final payment after five years. See In re Klaas, 858 F.3d 820 (3d Cir. 2017); and Germeraad v. Powers, 826 F.3d 962 (7th Cir. 2016). For ABI’s reports on those cases, click here and here.
Judge Bacharach said the disagreement was “understandable” given “the ambiguity inherent in the combination of §§ 1307(c), 1322, 1325, 1328(a), and 1329.”
To resolve the ambiguity, Judge Bacharach took counsel from Fla. Dep’t of Revenue v. Piccadilly Cafeterias Inc., 554 U.S. 33 (2008), which he interpreted to mean that “the payments are ‘under the plan’ only if they are subject to or under the authority of the plan.”
In the case on appeal, “the more natural reading here is that the payments could fall ‘under’ a plan only if the plan remained in existence,” Judge Bacharach said. In other words, payments “would permit a discharge only if they had been made during the existence of the plan.”
Of course, the term of the plan had ended, making the debtor ineligible to modify the plan and receive a discharge.
As a backstop, Judge Bacharach looked at legislative history because he had found the statute to be ambiguous. He was persuaded by the House Report and the notion that amended chapter 13 was designed to have “strict deadlines” preventing plans from running longer than five years.
Judge Bacharach upheld dismissal because “the plan’s expiration left the bankruptcy court without authority to grant a discharge.”
The Concurrence
Circuit Judge Allison H. Eid concurred in the judgment. She found no ambiguity in the statute. In her view, “a plan can only last five years.”
A “plan expires after five years,” Judge Eid said, “and payments cannot be ‘under’ a plan that has come to an end.” She concurred only in the judgment and not in finding the statute to be ambiguous.
Observations
The Tenth Circuit’s strict reading creates problems, particularly if the default occurs shortly before the end of the term of the plan, leaving the debtor no time to cure. Or, what if the trustee has miscalculated required payments? Is the debtor barred from making up the shortfall after the plan ends?
In the case on appeal, the debtor would have been a good candidate for a hardship discharge. In that regard, the court’s ability to grant a hardship discharge under Section 1328(b) suggests there is flexibility in the statute. The section allows the court to grant a discharge “at any time after the confirmation of the plan” if the default “is due to circumstances for which the debtor should not justly be held accountable.”
Although not free from doubt, the words “at any time after confirmation” suggest that the end of the term of the plan is not a cutoff for filing a hardship discharge motion. If that’s true, then why can’t a court provide a better result for creditors by allowing the debtor to make all payments required by the plan?
Although not considered in the circuit’s opinion, barring a debtor from curing plan defaults seems grossly unfair for someone who has diligently made payments for five years, to the best of her or his ability. Indeed, if the debtor might be entitled to a hardship discharge, why not allow the debtor to cure defaults and ensure her right to a discharge?
Splitting with the Third and Seventh Circuits, the Tenth Circuit held that a chapter 13 debtor cannot cure a post-confirmation default on a mortgage after the five-year plan has expired. In other words, the appeals court believes that a belated payment would be an impermissible modification of the plan after the term of the plan has ended.
Even though the debtor had tendered cure payments, the appeals court upheld dismissal of the case, with the effect of denying the debtor’s discharge, although she had made all plan payments to the chapter 13 trustee.
The Accident and the Default
In 2014, the debtor confirmed her chapter 13 plan, with monthly mortgage payments going directly to the lender. She was current on the mortgage at filing and remained current until she had an auto accident in 2018. With additional expenses after the accident, the debtor missed two mortgage payments “in the final months of her five-year plan,” Circuit Judge Robert E. Bacharach said in his July 23 opinion for himself and Circuit Judge David M. Ebel.
Parenthetically, Judge Bacharach said the debtor missed two more mortgage payments after the plan was over.