Sound the alarm.
What began as a trickle of Chapter 13 cases ending badly has become a torrent.
More and more, bankruptcy judges are strictly enforcing the direct pay term of Chapter 13 plans.
UPDATE: December, 2020 COVID relief bill provides an out for debtors who aren’t current on their mortgages, effective for a year. More
If your plan says you will pay your on-going mortgage payments directly, and you don’t pay as promised, the judge may dismiss your case without a discharge.
After three to five years in bankruptcy, you end up with neither house nor a discharge of your debts.
Chapter 13 plans have teeth
Here’s why failing to follow through on your plan can be fatal.
The Chapter 13 plan becomes a court order when it’s confirmed by the court. It requires the creditors to wait for their money, sets out the payments to be made, and binds all parties to its terms.
In many districts, the trustee pays any arrearages on home mortgages, but the debtor pays the mortgage payments directly that come due during the plan.
But all too often, the debtor stops making the on-going payments to the mortgage lender, without telling any of the other interested parties, like their attorney, the trustee, and the court.
The lack of payments goes unremarked.
But with the advent of Rule 3002.1, there’s a reckoning at the end of the plan. The trustee files with the court a notice of final cure payment, alleging that all is well with the mortgage.
When the lender responds that the debtor isn’t current on the post filing payments, all hell breaks loose.
Too often, the court finds that the debtor’s failure to pay the ongoing mortgage payments is a material breach of the plan. Because the plan hasn’t been fully performed, the case gets closed without a discharge.
Presumably, foreclosure follows, or another Chapter 13 filing.
Why Chapter 13’s are dismissed
In the debtor’s mind, it’s easy to see the on going payments as something just between the borrower and the lender. If the lender isn’t happy, it can ask for relief from stay.
But the bankruptcy system sees it differently.
Since the debtor proposed the terms of the Chapter 13 plan, there’s a logic in sanctioning the debtor if he doesn’t do as he proposed to do.
The court would certainly sanction creditors if they didn’t honor the plan.
Consequences of dismissal
Dismissal without a discharge means that none of your debts is wiped out at the end of the plan.
Sometimes, that’s OK, if you’ve managed through the plan to pay taxes or your car loan.
But more often, it means that your personal obligation on the home loan lives on, along with any of the unsecured debt like credit cards, pay day loans, and medical bills survive as legally enforceable debts.
If you stripped off an underwater mortgage or avoided a judgment lien in the Chapter 13, you lose those benefits.
Preserving your bankruptcy discharge
The trick to getting your discharge is simple: speak up.
Talk to your attorney when you begin having trouble making the on-going mortgage payment.
Talk through whether the problem is temporary or the inevitable consequence of too little income or intervening circumstances.
There are fixes.
- You can modify your plan to terms you can live with as long as you are within the five year duration of a plan.
- Maybe you surrender the house.
- Maybe you reduce the plan payment til you catch up on the mortgage.
- Maybe you dismiss this case and refile again to include the new arrears in a new plan.
- Maybe converting to Chapter 7 works for you now.
But know that failing to address the issue puts the discharge at risk. Chances are, you have too much at stake to keep quiet.