CHAPTER 4, E. Fail to Make Direct Payments to Secured Creditors? Discharge OK

• Jurisdiction: United States

E. Fail to Make Direct Payments to Secured Creditors? Discharge OK

ABI Journal

May 2019

Brett Weiss

The Weiss Law Group, LLC

Greenbelt, Md.

Are chapter 13 debtors who fail to make direct post-petition payments to secured creditors as provided for in the plan entitled to a discharge under § 1328(a)? The answer is "yes."

It is hard enough for chapter 13 debtors to obtain a discharge. According to a 2017 ABI Journal article,¹ only 38.8 percent of chapter 13 debtors actually complete their plans; the remainder are dismissed or converted. Most chapter 13 practitioners would attribute this to the conflict between the required dedication of 100 percent of disposable income to the plan and, well, life. Paying every penny to the chapter 13 trustee, which results in having no savings or a contingency fund (when coupled with unexpected flat tires, illness, a leaky roof or other problems), is far too often a recipe for a failed plan. The cases that find it appropriate to deny a discharge to debtors whose secured creditor payments are not current at the time their plan payments have been completed make this Sisyphean task even harder.

The denial of a discharge under these circumstances is a new development in the law. As Hon. Thomas L. Perkins put it in In re Gibson,² "This Court, in [17] years on the bench, has never dismissed a chapter 13 case without discharge, where the required payments to the trustee were completed, for the reason that the debtor failed to make all of the direct mortgage payments." The line of cases even considering such a possibility began with In re Heinzle.³ Judge Perkins attributes Heinzle and its progeny to have originated from the 2011 adoption of Bankruptcy Rule 3002.1, subsection (g) of which requires a creditor that holds a lien on the debtor's principal residence to disclose, in response to the trustee's notice of final cure payment, whether the debtor is current on post-petition mortgage payments. Before this, unless a motion for relief from the automatic stay had been filed, chapter 13 trustees were unaware of the post-petition status of any of the debtor's secured debt payments.

Heinzle based its ruling on 11 U.S.C § 1328(a), which states, in pertinent part, that "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 ... except any debt (1) provided for under section 1322(b)(5)." The essential question is what the phrase "all payments under the plan" means. Heinzle and the cases following its holding find that the clear reading of this phrase includes post-petition secured debt payments. Those rejecting Heinzle believe it equally apparent that the clear reading of this phrase does not include post-petition secured debt payments. Heinzle misreads the Bankruptcy Code, and its holding should not be followed for both legal and practical reasons.

Rule 3002.1

Rule 3002.1 was adopted as a consumer-protection measure to allow debtors an opportunity to contest, before the conclusion of their case, allegations by lenders that the mortgage payments on their homes were not current.⁴ Using it as a basis to deny a debtor a...