When Stay Relief Isn’t the End of the Story in Chapter 13 Plan

By Peter C. Bastianen, Esq.
Codilis and Associates, P.C.
USFN Member (IL, IN, MI, MO, TX, WI)

Some mortgage servicers may believe that when there is no automatic stay in effect or stay relief is obtained, either before or after confirmation of a Chapter 13 plan that proposes to cure a default, they are free to proceed with foreclosure proceedings. However, stay relief is not always the end of the story. The effect of plan confirmation must also be considered. This article discusses the effect of plan confirmation on a mortgage servicer’s ability to proceed with the foreclosure process when there is no stay in effect or stay relief has been obtained.

When a Chapter 13 bankruptcy case is filed, the automatic stay generally goes into effect with respect to real property and remains in effect until relief from the stay is obtained, the property is abandoned in combination with the entry of a discharge, or the case is dismissed or closed. If the debtor had a prior case dismissed within one year, the stay goes into effect for 30 days but may be extended. If the debtor had two or more prior cases dismissed within one year, the stay does not go into effect but may be imposed.

One of the main reasons people file Chapter 13 bankruptcy cases is to cure a default on a mortgage. The plan can propose to cure a defaulted mortgage in one of several ways. If the real estate is the debtor’s principal residence and the loan has not matured or will not mature during the life of the plan, the plan can propose to cure the pre-petition default within a reasonable time while maintaining ongoing post-petition mortgage payments as they come due (Cure and Maintain Plan). If the real estate is not the debtor’s principal residence, or if it is the principal residence and the loan has matured or will mature during the life of the plan, the plan can (1) propose to pay the loan in full over the life of the plan (Total Debt Plan); or (2) if the value of the real estate is less than the balance owed on the mortgage, pay the value over the life of the plan as a secured claim and pay the balance as an unsecured claim (Cram Down Plan).

The Bankruptcy Code provides that confirmation of a plan is binding on all creditors. A confirmed plan functions as a court-ordered binding contract. The plan remains binding even when no automatic stay is in effect or when stay relief is obtained. Accordingly, mortgage servicers and their counsel must evaluate both the status of the automatic stay and the binding effect of any confirmed plan that proposes to cure a default before proceeding with foreclosure.

If no stay is in effect or stay relief is obtained before confirmation of a plan that proposes to cure a default, the creditor may proceed with foreclosure, but an objection to the plan should be filed to prevent confirmation of the conflicting plan.[1]  The loan should not be closed out of bankruptcy until the plan is amended to remove the cure provisions or the case is dismissed. If a plan that proposes to cure a default is confirmed, even when there is no stay in effect or stay relief has been obtained, proceeding with foreclosure may expose the creditor to sanctions – not for violating the stay, but for violating the terms of the confirmed plan.

If no stay is in effect or stay relief is obtained after confirmation of a plan that proposes to cure a default, the binding effect of the confirmed plan must still be considered before proceeding with foreclosure. Only the debtor or trustee may amend a plan; a stay relief order does not amend the plan. Proceeding with foreclosure following confirmation of a plan that proposes to cure a default may create issues if the trustee or debtor continues making payments and the creditor continues to accept payments. 

Before closing a loan out of bankruptcy or proceeding with foreclosure in a Chapter 13 case in which no stay is in effect or stay relief has been obtained—either before or after confirmation of a plan that proposes to cure the default—mortgage servicers and counsel should seek guidance from a USFN Member firm in their state regarding best practices.