Debtor who Fails to Make Direct Payments to Secured Creditor under “Cure and Maintain” Plan is Not Entitled to a Discharge since they are “Payments Under the Plan”

Debtor who Fails to Make Direct Payments to Secured Creditor under “Cure and Maintain” Plan is Not Entitled to a Discharge since they are “Payments Under the Plan”

Pending before the Court in these two otherwise unrelated chapter 13 cases is a common issue: whether a chapter 13 debtor is entitled to a discharge when he/she does not make his/her direct post-petition mortgage payments due under a confirmed plan. One case involves the additional issue of whether the Court should vacate a discharge granted to a debtor who failed to make direct post-petition mortgage payments, while the other case involves the additional issue of whether debtors should be allowed to modify a confirmed plan in the final month to change the treatment of their home from retain to surrender.

Statutory Overview and Statutory Construction of “Payments Under the Plan”

A debtor bears the burden of establishing by a preponderance of the evidence that his or her plan satisfies the requirements of the Bankruptcy Code and is appropriate for confirmation. See In re Zair, 535 B.R. 15, 18 (Bankr. E.D.N.Y. 2015), rev’d, HSBC Bank USA, N.A. v. Zair, 550 B.R. 188 (E.D.N.Y. 2016), appeal dismissed, No. 16-1648 (2d Cir. Dec. 7, 2016); In re Merhi, 518 B.R. 705, 709 (Bankr. E.D.N.Y. 2014). The contents of a chapter 13 plan are governed by § 1322, which is generally divided between mandatory provisions outlined in § 1322(a) (what a chapter 13 plan “shall” provide), and permissive provisions outlined in § 1322(b) (what a chapter 13 plan “may” provide).

Section 1325 provides for the circumstances under which a bankruptcy court “shall” and “may not” confirm a plan. Hamilton v. Lanning, 560 U.S. 505, 508 (2010). As to secured creditors, § 1325(a)(5) directs that a bankruptcy court shall confirm a plan only if one of the following three requirements are satisfied: (1) the holder of such claim has accepted the plan; (2) the debtor’s payments to the creditor comply with certain standards and the creditor retains its lien; or (3) the debtor surrenders the property securing such claim to such holder. See AmeriCredit FinServs., Inc. v. Tompkins, 604 F.3d 753, 756 (2d Cir. 2010) (citations and quotations omitted). As the United Stated District Court for the Eastern District of New York recently stated:

[t]hese are the exclusive methods of repaying a secured creditor, and a proposed Chapter 13 plan which, as to each secured claim, does not satisfy one of these three requirements, cannot be confirmed, even if the plan complies with the Bankruptcy Code in all other respects.

Congress provided chapter 13 debtors with the option to make payments directly to their creditors. Section 1326(c) provides that “[e]xcept as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan.” See Mendoza v. Temple-Inland Mortg. Corp. (In re Mendoza), 111 F.3d 1264, 1269 (5th Cir. 1997) (holding that while § 1326(c) provides that payments are generally made through the trustee “Chapter 13 permits the debtor to act as the disbursing agent and to make payments to a creditor directly.”); In re Aberegg, 961 F.2d 1307, 1309 (7th Cir. 1992). Many districts in the United States have chosen to expressly act as “conduit districts,” meaning all plan payments must be made through the office of the standing chapter 13 trustee in accordance with § 1326(c); debtors in those districts may not make direct payments to creditors. See In re Heinzle, 511 B.R. 69, 74 (Bankr. W.D. Tex. 2014); see, e.g., Local Rule 3015-1(b) for the United States Bankruptcy Court for the Southern District of Texas, effective December 1, 2015 (“Home mortgage payments will be made through the chapter 13 trustee[.]”); Local Rule 3070-1 for the United States Bankruptcy Court for the Eastern District of Michigan, effective February 1, 2016 (“In a chapter 13 case, all claims must be paid by and through the chapter 13 trustee unless the debtor’s plan establishes cause for remitting payments on a claim directly to the creditor.”). However, many districts, including the Eastern District of New York, have chosen not to require debtors to make their post-petition mortgage payments through the chapter 13 trustee, but rather allow such payments to be made directly to the secured creditor

in accordance with § 1326(c). See Heinzle, 511 B.R. at 74; see also Gordon Bermant & Jean Braucher, Making Post-Petition Mortgage Payments Inside Chapter 13 Plans: Facts, Law, Policy, 80 AM. BANKR. L.J. 261, 270 (2006).

As for the timing of a discharge, § 1328(a) provides in relevant 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 or disallowed under section 502 of this title, except any debt—

(1) provided for under section 1322(b)(5)[.]

11 U.S.C. § 1328(a)(1). Thus, the first issue here is what does “payments under the plan” mean?

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