Author:Maier, Stephen J.

    The United States Bankruptcy Code (hereinafter "Code") was enacted to enable individuals who are either disinclined or incapable of accounting for well-founded debts, held by creditors, to repay and satisfy any remaining delinquencies. (1) The Code, subject to certain limitations, (2) bestows upon a consumer debtor the discretion to either voluntarily seek relief pursuant to chapter 7 or chapter 13, (3) the latter of which enables consumer debtors to remain in custody of their home throughout the duration of their respective plan. (4)

    Of these incentives, one of the most notable is the augmented fortification from home mortgage foreclosure shield that chapter 13 provides. (5) The prominence of this protection is enhanced when a debtor faces a looming threat of foreclosure. (6) Characteristically, where a debtor is no longer current on their mortgage, thus giving rise to a delinquency,

    the mortgagee typically accelerates payments and declares the entire outstanding balance due. If the debtor is unable to pay the accelerated amount on demand, generally the mortgagee exercises its state law right to foreclose on the encumbered property, either by initiating judicial foreclosure proceedings or through a private contractual power of sale. (7) Accordingly, when complications arise, the Code, as detailed supra, permits an individual to "fil[e] a chapter 13 petition... cur[ing] prepetition default[s] by paying off arrearages and reinstating the contractual payments as part of a chapter 13 repayment plan." (8) Consequently, chapter 13 allows a debtor to "retain[] possession of all property of the estate," (9) markedly, one's principal residence. (10) The protections afforded to consumer debtors--as per the Code--allows one to attain the eventual target of a chapter 13 case, that is, receiving a discharge. (11)

    An alternative incentive, ultimately enticing individuals to seek chapter 13 relief--as opposed to chapter 7--is the verity that a "chapter 13 discharge under section 1328(a) is broader than the discharge under section 727." (12) Section 1328(a) provides, in pertinent 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." (13) Hence, following completion of a debtor's chapter 13 plan, all prepetition debts--with the exception of certain non-dischargeable debts--are discharged. (14) More often than not, consumer debtors who take this approach end up paying cents on the dollar with respect to their total unsecured debt, (15) which is why we must not overlook the other side of the equation, that being the creditors.

    Unsecured creditors favor chapter 13, for very rarely do they ever collect in chapter 7 cases. (16) Notwithstanding the benefits afforded to consumer debtors and the fundamental purposes attached therewith, the Code is also in place "to provide for equitable treatment of creditors who are competing for the debtor's limited assets." (17) Thus, while plan confirmation does not hinge on the debtor accounting for a particular percentage of their total unsecured debt, there is a hypothetical threshold that must be met. (18)

    Apart from the more objective criteria, the underlying requirement necessary in almost every bankruptcy petition is good faith. (19) Considering that--in the Second Circuit alone--there were 9,144 non-business filings under chapter 13 during a twelve month period ending March 31, 2017, (20) confirming that a debtor is not proposing a plan to either exploit the "provisions, purpose, or spirit of. . . chapter [13]" is essential, but at times difficult. (21) Making a determination of good faith shall be done on an ad hoc basis, taking into consideration several factors. (22) However, bankruptcy courts in non-conduit (23) jurisdictions must become far more vigilant when conducting said inquiry.

    This paper will address the underlying issues bankruptcy courts in non-conduit jurisdictions face when permitting consumer debtors to directly remit post-petition mortgage payments to the mortgage holder, as opposed to the designated chapter 13 trustee making such payments. This note argues that consumer debtors--under a cure and maintain plan--who fail to remain current with respect to their post-petition mortgage payments, should not receive a chapter 13 discharge. To provide context for this recommendation, Section II provides an overview of consumer debtor bankruptcy cases, Section III addresses the existing precedent supporting the proposition that direct post-petition mortgage payments constitute "payments under the plan," and Section IV establishes--based on statutory analysis and case law--why a delinquency with respect to direct post-petition mortgage payments constitutes a material default and several factors courts should consider in determining whether to dismiss or convert the chapter 13 case respectively. Finally, in Section V, I will offer several courses of action bankruptcy courts--namely, courts in the Second Circuit--may utilize in an attempt to remediate and potentially repair this recent ongoing dilemma.


    The chapter 13 case can be summarized in six notable steps: (1) the filing of a voluntary, chapter 13 petition by the debtor; (2) the appointment of a trustee; (3) formulation of the rehabilitation plan; (4) confirmation of the plan; (5) commencement of the plan while remaining steadfast to all obligatory undertakings enumerated therein; and (6) provided all provisions and commitments pursuant to the plan are fulfilled, the granting of a discharge. (24)

    1. The "Perfect Case"

      Presumably, all parties involved in the chapter 13 case would aspire to a conflict free proceeding whereby everyone receives what is sought after in the chapter 13 plan. For example, (25) assume Anthony Filer, a single father with a dependent daughter, works for Acme Corporation with a salary of approximately $50,000 annually. However, given a downturn in the economy, Acme Corporation pursues a collective layoff, Anthony Filer being one of the employees caught up in the downsizing of the company. Anthony Filer, being unemployed for nearly six months, fell behind on three of his mortgage payments, thus forcing him to accept employment with a much lower salary of $30,000 annually. Burdened with mortgage, credit card, and car payments, Filer was doubtful of his ability to catch up on his financial obligations. After consulting with an attorney, Filer elected to seek chapter 13 relief.

      Filer filed all necessary forms with the bankruptcy court, stopping the foreclosure proceeding and staying all collection activities pending against him. Following the meeting of creditors, the bankruptcy court held a confirmation hearing and Filer's chapter 13 plan was confirmed. (26) Filer's plan called for the curing of all pre-petition arrearages whereby Filer was to also make all post-petition mortgage payments directly to his mortgage company. Throughout the duration of the five-year plan, Filer remained current on all of his mortgage payments. At the conclusion of the five-year term, the bankruptcy court entered an order granting Filer a discharge, providing Filer with a fresh start.

      However, as we will see, such a perfect case does not always transpire.

    2. The Delinquent Mortgagor

      While "[t]he idea was for Chapter 13 debtors to be able to complete their plans successfully, then all could live happily ever after," this is but a mere abstraction, for the success rate, measured by completion of the plan, is far lower than what we presumably would anticipate. (27) The recent trend, particularly in the district courts, is that of an influx of consumer debtors electing the benefits of [section] 1322(b)(5), but subsequently failing to remit direct post-petition mortgage payments to the mortgage holder. (28) The recent trend at the door of bankruptcy courts throughout the United States consists of chapter 13 debtors requesting a discharge, demanding a fixed distribution to unsecured creditors and all-encompassing authority to appropriate post-petition income as they deem appropriate. (29)

      The issue is illustrated in In re Hoyt-Kieckhaben, where the Debtor sought relief pursuant to chapter 13 of the Code. (30) Under the plan, as confirmed by the court, the Debtor elected to cure past mortgage delinquencies while "continu[ing] to make the future contractual monthly mortgage payments directly to the mortgage holder." (31) Post-confirmation, however, the Debtor neglected to make twenty-four direct post-petition mortgage payments, amounting to an exceeding delinquency of $49,000. (32) In fact, this degree of delinquency is not uncommon: Bankruptcy courts throughout the United States have seen post-petition mortgage delinquencies valued at $49,000, (33) $33,467.35, (34) $30,378.21, (35) and $48,335.06. (36)

      Repeatedly, such post-petition delinquencies fly under the radar, evading detection from the bankruptcy court and appointed chapter 13 trustees throughout the entire term of the plan up until the point at which the chapter 13 trustee sends and receives a notice of final cure payment and response to notice of final cure payment respectively. (37) Moreover, the overall impact stemming from a consumer debtor's reluctance to satisfy all contractual monthly mortgage payments expressed in the plan is compounded when the proposed level of repayment to unsecured creditors fails to reach one-hundred percent. (38) That is, given that "the Code provides... that the plan, once approved... require[s] 'that all of the debtor's projected disposable income... beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan,'" consumer debtors who default with respect to their post-petition mortgage payments are living a "more comfortable lifestyle at the expense of their creditors,"...

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