Chapter 13 Debtor Not Entitled to Discharge Where She Failed to Pay Mortgage Payments “Outside the Plan”

Chapter 13 Debtor Not Entitled to Discharge Where She Failed to Pay Mortgage Payments “Outside the Plan”

Debtor  filed a Motion for Entry of Chapter 13 Discharge Due to Plan Completion, to which the Chapter 13 Trustee objects. The issue is whether the Debtor has made “all payments under the plan” as required by 11 U.S.C. § 1328(a), when she has failed to make her ongoing postpetition mortgage payments “outside the plan.”

The Debtor filed this case on May 25, 2012. At the time of filing, the Debtor had two mortgages on her home. She successfully stripped off a wholly unsecured junior mortgage. The first mortgageholder, NationCredit Financial Services Corporation, by its servicer, Select Portfolio Servicing, Inc. (“Select Portfolio”), filed a proof of claim showing a small prepetition “arrearage” consisting of escrow advances and one monthly payment, totaling $935.11. However, despite showing a so-called arrearage, the parties all appear to agree that the Debtor was actually current on her mortgage payments when she filed this case.

According to the Local Rules of this District, if a debtor has no past due payments or charges due to the holder of a mortgage claim, other than the regular payment due in the month of filing, the debtor may propose a Chapter 13 plan in which the debtor makes the postpetition mortgage payments directly to the holder of the claim, rather than through the Chapter 13 Trustee. Conversely, if a debtor is delinquent on mortgage payments on the date of filing, then in addition to paying an amount sufficient to cure the arrearage, the debtor must make the ongoing postpetition mortgage payments to the holder of the claim through the Chapter 13 trustee, as part of the monthly plan payments, unless the court orders otherwise.

Because the Debtor was current on her mortgage payments when she filed this case, she proposed a plan which provided for a monthly payment of $83 to the Trustee, and provided that she would make the ongoing postpetition mortgage payments of $691 per month directly to Select Portfolio, rather than through the Chapter 13 Trustee’s office, in accordance with the Local Rule. No one objected to that treatment, and so, with a minor modification not relevant here, the Plan was confirmed on August 7, 2012.3

On March 28, 2017, the Trustee filed a Notice of Completion of Chapter 13 Plan, meaning that the Debtor had made all of her Chapter 13 plan payments due to the Trustee. On April 26, 2017, the Trustee also filed a Notice of Final Cure Payment regarding Select Portfolio’s claim, saying he had paid the $935.11 prepetition “arrearage,” plus $300 in allowed postpetition fees, expenses and charges. However, because the ongoing postpetition payments were to be paid by the Debtor directly, the Trustee stated he had no knowledge of whether the Debtor was current on those postpetition mortgage payments.

On April 28, 2017, the Debtor filed a Motion for Entry of Chapter 13 Discharge Due to Plan Completion.

Meanwhile, however, the Debtor had defaulted on her postpetition mortgage payments and, on December 27, 2012, Select Portfolio filed a motion for relief from stay.  On May 5, 2017, Select Portfolio filed a Statement in Response to the Trustee’s Notice of Final Cure Payment, saying that there was a postpetition arrearage of $35,742.74; that the last payment it had received was dated June 3, 2013; and that the mortgage was due for the October 2012 mortgage payment.

Because of that, the Trustee objected to the Debtor’s Motion for Entry of Chapter 13 Discharge, asserting that, by failing to make the direct postpetition mortgage payments as she had proposed in her plan, the Debtor had failed to make “all payments under the plan” as required by § 1328(a) to receive a discharge.4 In addition, the Trustee asserts, since the Debtor was not making mortgage payments, she did not devote all of her disposable income into the plan, as required by § 1325(b)(1)(B).

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