CHAPTER 4, B. Denying Chapter 13 Discharges for Direct-Payment Defaults

• Jurisdiction: United States

B. Denying Chapter 13 Discharges for Direct-Payment Defaults

ABI Journal

June 2019

Ken Siomos

Marsha L. Combs-Skinner, Chapter 13 Trustee

Newman, Ill.

There has never been uniform agreement on what defines "success" in a chapter 13 case.¹ Some debtors might see success as receiving a loan modification to keep their home; others as procuring the return of their vehicle to retain their ability to drive to work. Many are undoubtedly seeking the discharge injunction in the hopes that their debt problems will be solved.

These debtors might lose their home or car after stay relief during their case, but they continue making their chapter 13 plan payments to the trustee, expecting at the end to receive their discharge. However, that discharge might never be forthcoming. This article explores the basis for the interpretation leading to this rising trend,² a potential interpretative oversight in these recent decisions, and the potential national impact of these recent decisions.

Like chapters 11 and 12, chapter 13 requires the debtor to propose a plan that, once confirmed, sets out who will be paid and how much.³ Section 1328(a) of the Bankruptcy Code states that "after completion by the debtor of all payments under the plan ... the court shall grant the debtor a discharge of all debts."⁴ Chapter 13 debtors can choose to pay some debts, most often mortgage or vehicle payments, directly to creditors, rather than using the chapter 13 trustee as a conduit.⁵ Doing so can reduce a debtor's expenses because paying via the chapter 13 trustee requires an additional payment for the trustee's percentage fee.⁶

In 2014, a bankruptcy court ruled that a debtor who failed to make the mortgage payments that they were to personally pay to the mortgage creditor — rather than through the trustee — was not entitled to a chapter 13 discharge.⁷ This decision relied heavily on a Fifth Circuit decision from 1982 that allowed debtors to make mortgage payments directly rather than requiring them to be paid by the trustee.⁸ The analysis was short, with some subsequent decisions following suit stating that the plain meaning of "under the plan" is clear, making analysis of similar statutory provisions unnecessary.⁹ However, other decisions have looked to other Bankruptcy Code provisions to clarify the meaning of § 1328(a).¹⁰

One such potentially clarifying provision is § 1326, in which the Code is clear 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."¹¹ It is reasonable to interpret this provision as implying that an alternative to the trustee making payments to creditors "under the plan" is the debtor making payments to creditors "under the plan."¹²

Interpreting the Bankruptcy Code, like all statutory interpretation, can be a "holistic endeavor."¹³ Looking to § 1326(c) to help resolve the meaning of § 1328(a) is therefore appropriate,¹⁴ but once § 1326(a) is reviewed to inform the interpretation of § 1328(a), historical precedent and other relevant Code provisions should also be reviewed.

The U.S. Supreme Court has made clear that the Bankruptcy Code should not be interpreted so as to "erode past bankruptcy practice absent a clear indication that Congress intended such a departure."¹⁵ The Code has not significantly changed in 80 years with respect to the chapter 13 discharge following completion of payments.¹⁶ Under the Chandler Act of 1938, a debtor under a "wage earners" plan was to be issued a discharge "[u]pon compliance by the debtor with the provisions of the plan and upon completion of all payments to be made thereunder."¹⁷ The current iteration of the Code similarly states that the discharge shall be entered "after completion by the debtor of all payments under the plan."¹⁸ Therefore, it came as a surprise to many when, 76 years after the Chandler Act, a court first held that a debtor was required to make all direct-pay mortgage payments during the term of the plan in order to receive a chapter 13 discharge.¹⁹

In addition to reading § 1326 to help inform the meaning of § 1328, and weighing that against the historical interpretation of the Bankruptcy Code to avoid the erosion of "past bankruptcy practice," courts should look to another provision similar to § 1328. Section 1329 of the Bankruptcy Code addresses modification of a chapter 13 plan, allowing such modification in certain circumstances as long as it is "before the completion of payments under such plan."²⁰ This language is substantively similar to the § 1328 language that a discharge be entered "as soon as practicable after completion by the debtor of all payments under the plan."²¹ Despite one rule of statutory interpretation suggesting that different statutory phrasings should be given different statutory meanings, it would be absurd to interpret "under the plan" differently from "under such plan." Granting different interpretations to these provisions would mean that a...