In the recent case of In re Heinzle, 2014 WL 2442261 (Bankr. W.D. Texas 5/30/14) the bankruptcy held that the debtors who completed all their plan payments to the trustee were nevertheless not entitled to a discharge because they were not current on their mortgage payments.
The debtors’ Chapter 13 plan provided to cure their pre-petition and some post-petition arrears and then pay the lender directly their on-going payments. Once the Chapter 13 trustee had sent the mortgage lender all the arrears as provided for in the plan, she filed a Notice of Final Cure Payment with the court. The lender agreed that it had received all the payments from the trustee, however, the lender filed a response which indicated that the debtors were 30 months behind on their post-petition payments. The trustee maintained that the failure of the debtors to make their post-petition payments constituted a default of their plan and accordingly, they were not entitled to a discharge. The debtors responded that they had completed all payments due under the plan by making all the payments for the last 60 months to the trustee. The court found the trustee’s argument persuasive and ruled that pursuant to the case of In re Foster, 670 F.2d 478 (5th Cir. 1982), the mortgage payments being sent directly to the lender are part of the plan treatment process and if the debtors were not current post-petition, they could not get a chapter 13 discharge.
All was not lost for these debtors. The court gave them 14 days to convert their case to a chapter 7 and receive a chapter 7 discharge. If they failed to convert the case to chapter 7, their current case would be dismissed.
The ruling in this case could present a real problem for debtors currently in Chapter 13 if they are not current on their mortgage payments post-petition. Some debtors fall behind on their payments close to the end of the case and may be working on a loan modification with the lender at the same time the plan payments have been completed. If the lender files a response to the Notice of Final Cure that indicates the debtor is not current on his post-petition payments, the debtor may not be eligible for a Chapter 13 discharge and may need to convert the case to a Chapter 7.
The attorneys at the law firm of Laura Margulies & Associates, LLC have assisted thousands of clients through the Chapter 13 bankruptcy process. Please call us for a consultation today. To learn more about our firm visit our web site at www.law-margulies.com.