Bankruptcy Court Joins Minority, Grants Discharge, and Denies the Trustee’s Motion to Dismiss for Delinquent Post-Petition Mortgage Payments

Bankruptcy Court Joins Minority, Grants Discharge, and Denies the Trustee’s Motion to Dismiss for Delinquent Post-Petition Mortgage Payments

On March 28, 2019 the Bankruptcy Court for the District of Arizona Denied the Trustee’s Motion to Dismiss based on the Debtors’ post-petition mortgage default. In doing so, she joined the minority position on this issue.

The Debtors filed their chapter 13 bankruptcy on July 18, 2014. Their plan proposed to pay back mortgage arrears to their mortgage lender through plan payments to the trustee. The plan also indicated that they would make direct payments to the mortgage lender for the future monthly mortgage payments. At the end of the plan the mortgage lender filed Response to Trustee’s Notice of Final Cure for Prepetition Arrears on Mortgage Claim, agreeing that the prepetition default was cured, but stating that the post-petition payments due on and after September 1, 2017 were delinquent. The Trustee then filed a motion to dismiss.

The court addressed the issue whether payments on a mortgage paid directly to mortgage holder and referenced in a chapter 13 plan are “payments under the plan” for purposes of 11 U.S.C. §1328(a) and if delinquent are a legitimate basis to dismiss the bankruptcy and deny a discharge.

Section 1328(a) states in pertinent part: “as soon as practicable after completion by the debtor of all payments under the plan,… the court shall grant the debtor a discharge of all debts provided for by the plan…” Similarly 11 U.S.C. § 1307(c)(6) allows a trustee to move to dismiss for cause including “material default by the debtor with respect to a term of a confirmed plan;…” As a result several chapter 13 trustees file motions to dismiss if they discover that a debtor is delinquent in mortgage payments.

There are two schools of interpretation of “payments under the plan.”

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