CHAPTER 7 GETTING THE DISCHARGE IN A CHAPTER 13

• Jurisdiction: United States

CHAPTER 7: GETTING THE DISCHARGE IN A CHAPTER 13

Following three to five years of making monthly payments to the Trustee, living within a carefully orchestrated budget, and feeling the stress and hope accompanied by bankruptcy, the final goal of the chapter 13 case is usually receiving the chapter 13 discharge. However, there are many obstacles and life events that may hinder the debtor's ability to reach this goal.

Should a debtor be denied the relief of a discharge due to defaulting on direct payments to creditors? Rule 3002.1 requires the chapter 13 trustees to issue notice of final cure payments to secured creditors. While this Rule was intended to help debtors with a process with addressing misapplication of payments and confirming that arrears have been cured, the Rule has also led to the previously undisclosed post-petition default to direct payment creditors. The consequences of such defaults are open to various interpretations. One argument is that § 1328(a)'s "payments under the plan" includes these direct payments, therefore finding that a debtor's failure to maintain these payments must result in a denial of their chapter 13 discharge. An alternate interpretation is that "payments under the plan" include only payments to the trustee, and so defaults to the direct payment creditors should not affect the chapter 13 discharge.

What happens to a case where the debtor passes away before receiving the discharge? The circumstances of the debtor's case and assets will affect the options for proceeding. If for example there are assets to be administered through probate, the heirs may benefit from the estate receiving a discharge to prevent creditors from filing claims against the probate estate. The heirs should consider several factors in determining the best course of action, including the type of assets, nature of the debt, and whether a hardship discharge or conversion to a chapter 7 case would be a possible alternative.

A. Don't Move the Goalposts

Section 1328 Should Not Deny Discharge to Debtor Who Completes Payments to Trustee, but Is Behind on Direct Payments

ABI Journal

May 2018

Written by:

David Cox

Cox Law Group PLLC

Lynchburg, Va.

Across the U.S., many chapter 13 debtors looking forward to the fresh start they have earned, after three to five years of careful budgeting and the completion of their plans, are opening their mail and finding a trustee's motion to dismiss their case instead of a final discharge order. Why? Some courts are construing the meaning of "payments under the plan" that are required for the issuance of a discharge under § 1328(a) to include more than just the payments that a debtor has made to the trustee pursuant to his/her plan.¹

Historically, "payments under the plan," as used in § 1328(a), has been understood to mean a debtor's payments to a trustee.² However, in the last few years a number of cases have interpreted the meaning of "payments under the plan" to also include other payments made directly by the debtor to creditors.³ Consequently, in some cases where courts have been made aware⁴ of debtors' defaults in direct payments to creditors,⁵ debtors have lost their discharges and suffered dismissals, conversions or unceremonious closings of their cases.⁶ The statutory language causing the problem is found in § 1328(a), which triggers the issuance of a discharge as follows:

[A]s soon as practicable after completion by the debtor of all payments under the plan, and in the case of a debtor who is required by a judicial or administrative order, or by statute, to pay a domestic-support obligation, after such debtor certifies that all amounts payable under such order or such statute that are due on or before the date of the certification (including amounts due before the petition was filed, but only to the extent provided for by the plan) have been paid, unless the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter, the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title.⁷

Admittedly, the meaning of "payments under the plan" could, in isolation, lead to conflicting interpretations. According to Judges Keith M. Lundin and William H. Brown, "[t]he Bankruptcy Code is silent with respect to when the "completion ... of all payments under the plan" occurs for purposes of discharge under § 1328(a).⁸ However, reading the words in the context of chapter 13 as a whole brings clarity to the meaning and confirms that such words should only refer to the debtor's payments paid to the trustee pursuant to the plan's terms.

Default in Direct Payments Does Not Warrant Loss of Discharge

While chapter 13 offers debtors a number of benefits in exchange for the commitment of all projected disposable income over a three- to five-year period, without question most chapter 13 debtors are working for one goal: the ultimate discharge of their debts. The fresh start offered by such a discharge "is the essence of modern bankruptcy law."⁹ Once a debtor has completed all payments under a plan, Congress has established few final hurdles to discharge under chapter 13 other than certifying the payment of domestic-support obligations and completing a course in personal-financial management.¹⁰

Chapter 13 does not include the same list of "bad acts" found in § 727 that lead to a denial of the entire discharge of a chapter 7 debtor, but similar conduct might result in the revocation of a chapter 13 discharge.¹¹ Specifically, a chapter 13 debtor's discharge could be revoked if obtained by the debtor through fraud under § 1328(e). However, this provision involves misconduct and would not implicate a debtor who defaults on a direct payment under he plan. Congress did not need nor intend to punish debtors with the denial of their entire discharge when they could have simply fallen behind in payments on a car or mortgage during a long chapter 13 plan. Such a severe penalty as the loss of discharge is typically reserved for the most egregious debtor behavior.¹²

Creditors affected by a debtor's default in direct payments would not typically benefit from the denial of the debtor's discharge.¹³ The direct payments that a debtor makes in chapter 13 under § 1322(b)(5) are excepted from discharge, and those creditors would not need the extraordinary protection from Congress of denying the entire discharge.¹⁴ Such debts typically are secured and nondischargeable, leaving the aggrieved creditor the additional option of enforcing its security agreement in the post-discharge collection of its debt.¹⁵

Statute's Language Indicates that Congress Never Intended for Discharge to Be Contingent on Direct Payments

Had Congress intended for a debtor's discharge to be contingent upon the payment of all direct-by-debtor payments, it could have provided for this in the same manner as it addressed post-petition support payments under § 1328(a).¹⁶ As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Congress added specific language in § 1328(a) to require that the debtor complete all post-petition domestic-support obligations and certify the same to the court as a prerequisite to receiving a chapter 13 discharge.¹⁷ Not only does the statute, as amended, clearly require the payment of all post-petition support payments as a condition of discharge, but it also outlines a mechanism for reporting the same to the court and all parties by certification so that the debtor's compliance with the provision and entitlement to relief might be confirmed at the conclusion of the case. In contrast to other direct payments, a debtor might be required to pay a creditor according to the plan, but the Bankruptcy Code does not require a similar certification, nor has it ever required such.

In Chapter 13, "Payments Under the Plan" Consistently Refers Only to the Payments Made by the Debtor to the Trustee

Interpreting "payments under the plan" as plan payments to be paid to a trustee pursuant to the terms of a confirmed plan is consistent with how the Bankruptcy Code has been implemented since its inception and how these words are interpreted elsewhere under chapter 13.¹⁸ For example, § 1325(b) requires the plan to provide that all of the debtors' projected disposable income "to be received in the three-year period beginning on the date that the first payment is due under the plan will be applied to make payments under the plan'"¹⁹These payments applied to make "payments under the plan" are the debtor's payments paid to the trustee, so that they can be distributed to allowed claimants.

Furthermore, § 1329(a) limits any modification of a plan after confirmation to be filed "before the completion of payments under such plan"²⁰ In Gibson, Hon. Thomas L. Perkins found it "well settled that 'completion of payments' under this provision occurs when the debtor pays to the trustee the full amount required by the confirmed plan."²¹ Thus, the payments "under such plan" are the debtor's payments to the trustee.

Even the chapter 13 trustee's compensation is tied to a percentage of "payments under the plan."²² Under § 326(b), the court may allow reasonable compensation "for a trustee's services, payable after the trustee renders such services, not to exceed five percent upon all payments under the plan"²³ In all of these examples, as well as many others, the concept of "payments under the plan" unquestionably refers to the payments to be paid to the trustee by the debtor under the plan, in the same way that those words are intended in the critical discharge language of § 1328(a).

Interpreting "Payments Under the Plan" to Include Direct Payments to Creditors Creates Illogical Results

Reading § 1328(a) to also include direct-by-debtor payments as "payments under the plan" creates practical problems in certain situations. For example, consider a debtor who pays his/her mortgage payments directly as part of a...