CHAPTER 4, F. Fail to Make Direct Payments to Secured Creditors? No Discharge

• Jurisdiction: United States

F. Fail to Make Direct Payments to Secured Creditors? No Discharge

ABI Journal

May 2019

Michelle H. Bass

Wolfson Bolton PLLC

Troy, Mich.

If you are a rule-follower, debtor clients can be disorganized, forgetful, careless, perhaps even reckless and desperately in need of structure. Rules are not made to be broken, and when approached by clients for leniency after breaking the rules, just remember the following: Strict adherence to the rules will set you free — free of all debts provided for by the plan.

It might surprise a rule-follower to learn that language contained in the discharge provision of 11 U.S.C. § 1328(a) has recently come under fire.¹ Bankruptcy courts around the nation are being asked to evaluate a debtor's right to discharge after they fail to make, in some cases, years' worth of mortgage payments. These debtors are challenging the secured creditors' and chapter 13 trustees' objections to their discharges despite their own shortcomings during the course of their cases. These debtors assume that the rules do not apply to them, and that the terms of the plan that they sought approval of can be amended in their favor after plan expiration.

The debtors raising these challenges are in need of a serious reality check. The statutory language is clear that chapter 13 debtors are eligible for a discharge as soon as possible after completion of all payments under the plan, so long as they make all payments provided for by the plan. Therefore, debtors who fail to make all payments provided by the plan after the time for completion of payments are presumably ineligible under § 1328(a).

Much like enjoying dessert after dinner, the benefit of the discharge is premised on the debtor completing all required payments under the terms of a plan. Why should a debtor expect to receive such significant relief for doing anything less than what is required by statute? The debtors' argument is rooted in the perceived difference between payments made "by the plan" (payments disbursed by the chapter 13 trustee) and payments made "under the plan" (payments identified in the plan that the debtor has proposed to make directly). Turning to the language in the statute itself, 11 U.S.C. § 1328(a) provides:

Subject to subsection (d), 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.²

For some, this statutory language opens the door to an argument that a debtor can receive a discharge of all pre-petition debts if they simply make all required trustee payments. But what about payments provided for by the plan that the debtor forgot to make, or chose not to make? What good is a discharge if it excludes debts associated with payments that the debtor specifically omitted during the life of the plan?

This nuanced language might appear to be insignificant, but the disagreements that have emerged between the affected parties are great. The difference of opinion on this subject has led to a variety of outcomes for consumer debtors upon plan expiration, ranging from the loss of one's home and discharge, to receipt of a discharge with the retention of secured property despite the debtor's failure to make secured mortgage payments.

While different interpretations of the discharge provision have in large part been opined over the last decade,³ the majority of bankruptcy courts ruling on this issue agree that "payments under the plan" in 11 U.S.C. § 1328(a) refer to any payment made pursuant to a chapter 13 plan. This is regardless of whether such payment is made by a debtor directly to the creditor or through the trustee.⁴ Therefore, if the phrase "payments under the plan" refers to any payment prescribed by the plan, failure to make a payment or otherwise account for it prior to plan expiration subjects a debtor to loss of their discharge. Any other interpretation for this term of art would serve to ignore, or even contradict, the statute.

The Majority View: Reality Check

A recent case from the Southern District of Illinois highlights the majority view — or rather, the harsh reality — that payments under the plan include all payments referenced by the plan. In Simon v. Finley (In re Finley),⁵ the debtors filed a motion for entry of discharge after expiration of their plan. In their motion, the debtors stated they had made all payments provided for by their confirmed plan. As it turns out, the debtors were post-petition delinquent on their mortgage by more than $70,000 — a fact they did not dispute but failed to disclose in their...