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Eastern District of VA Affirms Bankruptcy Court Decision: Chapter 13 Discharge Denied due to Missed Post-Petition Mortgage Payments

Posted By USFN, Wednesday, February 22, 2017
Updated: Wednesday, February 15, 2017

February 22, 2017

by Nisha R. Patel and Michael T. Freeman
Samuel I. White, P.C. – USFN Member (Virginia)

In the recent ruling in Evans v. Stackhouse, WL 150247 (E.D. Va. Jan. 13, 2017), the Newport News Division of the Eastern District of Virginia addressed whether a debtor must remain current on mortgage payments during the Chapter 13 Plan. The district court affirmed the bankruptcy court’s decision to deny the debtor her discharge and subsequently dismiss her case.

Evans filed a petition under Chapter 13 of the Bankruptcy Code on June 11, 2010, and Stackhouse was appointed to serve as the Chapter 13 trustee. On August 26, 2015 the trustee filed and served upon Evans, her counsel, and her mortgage company (CitiFinancial) a Notice of Final Cure Payment pursuant to Fed. R. Bankr. P. 3002.1(f). CitiFinancial’s response reflected that although Evans had successfully brought current the pre-petition arrears owed on her mortgage, she was approximately nine months past due on her post-petition mortgage payments. The trustee subsequently filed a Motion to Close Case without Entry of Discharge, asserting that Evans failed to make “all of the payments due under the Plan,” and that her case should therefore be closed without discharge or be converted to Chapter 7.

Evans filed an answer, contending that post-petition mortgage payments are not included “under the Plan” per the plain language of 11 U.S.C. § 1322(b)(5), § 1322(d), as well as Evans’ confirmed Chapter 13 Plan. The debtor further argued that denying her discharge would “severely disrupt the premise behind most chapter 13 filings and … the process in general.”

The bankruptcy court disagreed. In an opinion issued on January 5, 2016, Chief Judge St. John referenced several decisions throughout the country before concluding that 11 U.S.C. § 1328 plainly requires debtors to complete all payments under the plan — whether to the trustee or directly to the creditor — in order to receive a Chapter 13 discharge. Judge St. John explicitly rejected Evans’ argument that denying her discharge would produce either an absurd result contrary to Congressional intent or an excessively harsh outcome.

On Appeal
In March 2016, Evans appealed. The district court affirmed, holding that “all payments under the plan” in § 1328(a) clearly incorporates both plan payments made by the debtor to the Chapter 13 trustee as well as direct payments made by the debtor to her creditors. The court also echoed Judge St. John’s opinion that providing Evans with a discharge after she failed to maintain post-petition mortgage payments would actually contravene the Bankruptcy Code. Evans’ ineligibility for discharge left the bankruptcy court with only two options: to dismiss her case or convert it to Chapter 7. Since Evans did not request a conversion to Chapter 7, the court concluded that dismissal was in the best interests of the debtor’s estate and of all creditors.

Through the end of 2016, neither the Alexandria nor the Richmond divisions of the Eastern District were denying discharges to debtors who failed to maintain post-petition direct payments. Because the district court’s ruling in Evans is binding on all divisions, however, debtors will need to find another way to ensure that they do not make 36-60 months of plan payments for nothing. Otherwise, debtors may find themselves in another Chapter 13 proceeding only months after the closing of their previous case — and may have difficulty obtaining an extension of the automatic stay as to all creditors the second time around.

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February e-Update

Note for consideration of the USFN Award of Excellence: This article is not a "Feature."


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