In re Gibson, ___BR___12-81186 (Bankr. C.D. Ill. March 5, 2018)
A developing issue, in Chapter 13 cases with confirmed Chapter 13 plan, is whether or not the Chapter 13 debtor is still eligible to receive a Chapter 13 discharge, despite the fact that the Chapter 13 debtor fails to make payments direct to creditor(s) (usually secured creditors) that are required to be made, direct to the creditor(s) by the Confirmed plan.
Courts are Split on whether or not a Debtor should be denied a Chapter 13 discharge, where the debtor fails to make direct payments to creditors that the confirmed Chapter 13 plan requires the debtor to make. In In re Gibson, an Illinois bankruptcy judge interprets Rule 3002.1 as being ‘debtor-friendly,’ not as creating new grounds for denial of a chapter 13 discharge, and held that a debtor failing to make direct payments on a nondischargeable mortgage is not grounds for denying a chapter 13 discharge, according to Bankruptcy Judge Thomas L. Perkins of Peoria, Ill. This is an issue that will eventually get ruled on by Circuit Courts, and if the Circuit Courts split, is likely to be ruled on by the US Supreme Court.
Gibson is contrary to several recent decisions ruling the OPPOSITE. It is a minority position. But Gibson opinion contains a compendium of cogent arguments favoring chapter 13 debtors who have made all payments to the trustee and were not defrauding unsecured creditors.
Here is discussion of facts in In re Gibson: The debtors confirmed a five-year plan calling for payments of $350 a month. The plan provided for the debtors to make direct payments on the first and second mortgages on their home. Although the first mortgage was current at filing, there was more than $9,000 in arrears on the second mortgage to be cured under the plan with payments from the trustee.
Near the end of the plan payments, the trustee filed and served two notices under Bankruptcy Rule 3002.1(f) pertaining to the mortgages. The notices stated that the debtors had made all payments required to be made to the trustee, that the pre-petition arrears on the second mortgage had been paid, and that the debtors were to make direct payments on both mortgages.
The lender on the second mortgage responded under Rule 3002.1(g) by saying that the arrears had been cured but that the debtors were about $19,000 in default on second mortgage payments due after filing.
The trustee then moved to dismiss the chapter 13 case without granting a discharge.
The Bankruptcy Judge held a trial and concluded that the debtors misunderstood the plan. According to the judge, the debtors believed they were not required to make payments on the second mortgage. They testified that they understood their lawyer as telling them that they were only required to pay the first mortgage.
Judge denied the trustee’s motion to dismiss and granted the discharge, noting, however, that the debt on the second mortgage was not dischargeable.
In his 17 years on the bench, the judge said, he had “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.”
Judge Perkins said that “this recently identified theory of dismissal” for failure to make direct payments resulted from the 2011 amendment adding Rule 3002.1 and requiring a mortgage lender to disclose whether the debtor was current. The new rule, he said, “was not intended to serve as the impetus for dismissal without discharge.” Rather, the new rule was designed for a “debtor-friendly purpose,” namely, giving the debtor a forum for resolving disputes when the parties disagree on whether a mortgage is current.
Until “very recently,” Judge Perkins said, “countless chapter 13 debtors received a discharge despite an uncured default in payments to a creditor made direct by the debtor.”
The governing statute, Section 1328(a), requires the court to enter a discharge “after completion of all payments under the plan.” Does “payments under the plan” only refer to payments made by the trustee, or does the term include payments that debtors undertake to make directly to mortgagees?
Judge Perkins said that the statute is ambiguous because it is susceptible to different interpretations. He noted that the statute refers to “payments under the plan,” not “payments provided for by the plan.”
Since a plan cannot have payments beyond five years, Judge Perkins theorized that direct payments on long-term debt that continue for more than five years are not made “under the plan” and thus are not grounds for denial of discharge.
He also noted that the 2005 amendments to Section 1328(a) require the debtor to certify that he or she has made all domestic support payments. The statute, Judge Perkins said, “never has required the debtor to certify that he has paid all other direct payments.”
The case at bar did not involve debtors who defrauded unsecured creditors.
The debtors, Judge Perkins said, only harmed the mortgage lender, “which, for reasons not explained at trial, never took action . . . to enforce its rights.” Unsecured creditors, on the other hand, “received all that they were entitled to under the terms of the plan.”
Denying discharge, Judge Perkins said, is “not an appropriate remedy” when the “debtor’s conduct was truly innocent and unsecured creditors were not harmed.”
Click here to read ABI’s discussion of a case from the Eastern District of New York where Bankruptcy Judge Alan S. Trust of Central Islip, N.Y., developed other theories for debtors to retain their discharges even though they had missed direct payments.