February 5, 2014
by Deanna Lee Westfall
The Castle Law Group, LLC – USFN Member (Colorado, Wyoming)
In a recent Colorado opinion, the bankruptcy court held that the debtors’ failure to make mortgage payments directly to their mortgage creditor is grounds for denial of a Chapter 13 discharge and dismissal or conversion of a case. See, In re Daggs, BK Case No. 10-16518-HRT.
Chapter 13 plans in the District of Colorado, a non-conduit jurisdiction, indicate the amount of payments to be made to cure the arrears to each secured creditor and separately list post-petition payments to be made directly to the secured creditors throughout the plan term. Historically, debtors would receive their discharge if they made all payments to the trustee, regardless of the status of post-petition direct payments.
Pursuant to Federal Rules of Bankruptcy Procedure Rule 3002.1, mortgage creditors respond to the bankruptcy trustee’s notice of final cure with the status of post-petition direct payments, often indicating that the debtors are significantly behind in their post-petition mortgage payments. The failure to make post-petition mortgage payments as part of the obligations set forth in the plan led the Chapter 13 trustee to move for dismissal of the case immediately prior to discharge. Debtors’ counsel responded with a request for entry of discharge or, in the alternative, a conversion and possible Chapter 7 discharge.
On January 7, 2014, the Chief Judge of the Bankruptcy Court for the District of Colorado held that the failure to timely make payments directly to the debtors’ mortgage creditor, as provided in the plan, constitutes a material default with respect to the confirmed plan. As such, it is grounds for conversion or dismissal under 11 U.S.C. § 1307(c)(6). The court determined that the default (nine months of missed payments for a total of over $11,000) was material.
With regard to the debtors’ request for entry of their discharge, the court found that the failure to make the payments described in the plan to the mortgage creditor prevented the entry of a Chapter 13 discharge.
This case could have wide-reaching ramifications. In addition to eliminating the argument that the debtor is fully current when they clearly are not, converting a case or dismissing it eliminates lien-strips or cramdowns under Section 506. Moreover, the decision effectively reverses any consequences of not filing a proof of claim or errors in the proof of claim.
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