Cite as: Keith M. Lundin, Lundin On Chapter 13, § 85.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
There are many compelling reasons why Chapter 13 debtors with home mortgages should never make payments directly to the mortgage holder or mortgage servicer during the Chapter 13 case.1 Most of the good reasons for paying home mortgages through the Chapter 13 trustee are practical—based on decades of experience in hundreds of thousands of Chapter 13 cases. Having said that, the Bankruptcy Code was not constructed to require the payment of home mortgages through the trustee in Chapter 13 cases.2 Creative Chapter 13 trustees have responded to the problems presented by the Code, and increasingly districts across the country are pulling home mortgage payments into the regular distribution routine. Districts that do so experience a reduction in litigation between debtors and mortgage holders, and trustees report greater stability in Chapter 13 plans that include home mortgages. Detailed below, the consequences of direct payment of home mortgages are almost all bad for debtors and for the Chapter 13 system as a whole.
Bankruptcy and appellate courts have failed to reach consensus on terminology for payment of a home mortgage by the debtor directly to a mortgage lender or servicer. “Direct payment” is emerging as the preferred description, but some decisions persist in describing direct payment by the debtor as payment “outside” the plan.3
The Bankruptcy Code permits but does not require Chapter 13 debtors to make payments directly to a creditor without assistance by the trustee.4 Because mortgage payments are large relative to other secured debt payments and because home mortgages are somewhat sacred in the constellation of debt,5 many Chapter 13 debtors insist on paying their home mortgages directly to the holder or servicer even when prepetition mortgage defaults brought the debtor to Chapter 13 in the first place. Too many debtors’ attorneys turn a blind eye to the reality that it is a curse, not a favor, to accommodate a debtor’s wishes to make direct payment of a home mortgage.
Plans that pay home mortgages directly to the creditor fail at an astonishing rate.6 Those that make it to discharge too often produce a debtor still in default after completion of payments to other creditors.7 The volume of stay relief and other litigation generated by plans that pay home mortgages directly is known to every bankruptcy judge in any district that has both direct-payment plans and plans that pay mortgages through the Chapter 13 trustee. The fantastic volume of litigation between Chapter 13 debtors and mortgage servicers with respect to the allocation of payments, postconfirmation accumulated defaults and the like8 is testament to how poorly direct payment works in the real world.
The principal arguments in favor of direct payment of home mortgages are based on misunderstanding and misinformation. Debtors’ attorneys unfamiliar with Chapter 13 practice across the country first argue that payment of the ongoing monthly mortgage through the trustee—sometimes called “conduit” payment—costs the debtor too much money in fees to the standing trustee.9 After the 1986 amendments to 28 U.S.C. § 586(e), it is true as a matter of statutory construction that the Chapter 13 trustee is not entitled to a percentage fee on payments by a debtor directly to a creditor.10
But a review of the actual numbers does not support this argument. In some districts, Chapter 13 trustees handle conduit mortgage payments for no fee or for a reduced fee. In many districts, conduit mortgage payments are subject to trustee compensation, but because of the relatively large amount of money involved, the percentage fee necessary to operate the standing trustee’s office quickly falls from the maximum 10 percent allowed by the Code11 into the 3 to 5 percent range. At the reduced fee levels that result from handling conduit mortgage payments, the entire Chapter 13 program in the district benefits and many debtors—depending on the absolute size of the mortgage payment—actually pay less in total trustee fees once conduit mortgage payments become the rule in the district.
The second most common argument against payment of home mortgages through the trustee is that the timing of distributions by the trustee’s office often falls at the end of the month—after the due date of many home mortgages—causing late charges and other penalties during the Chapter 13 case. After Nobelman v. American Savings Bank,12 it is arguable that any distribution after the contract due date during the Chapter 13 case can trigger a late charge that survives to haunt the debtor at the completion of payments under the plan.13
Clever Chapter 13 trustees solved this problem years ago. There are many decisions interpreting the powers to cure defaults in § 1322(b)(3) and (b)(5) that conclude a Chapter 13 plan can cure both pre- and postpetition defaults.14 There is always some financial disruption at the beginning of a Chapter 13 case, and it is difficult—often impossible—for a debtor to accumulate enough money in the hands of the standing trustee at confirmation to make all the payments required by the plan, including an ongoing mortgage payment from the first month after confirmation.
Trustees who routinely handle home mortgages have learned to treat the months between the petition and confirmation as part of the “default” that will be cured by the debtor in a reasonable time consistent with § 1322(b)(5).15 These trustees code their computers to treat the current mortgage payment to begin in the first full month after confirmation with the result that the first ongoing payment made by the trustee is actually early in the sense that it is not due until the next calendar month. No late charges will arise during the Chapter 13 case so long as the debtor makes timely plan payments to the trustee. The breathing space created by this mechanism gives plans a kick start, improving the likelihood of success. Mortgage creditors know from the get-go exactly how to program the “start date” for ongoing mortgage payments, and they know exactly how much arrearage is due. This system avoids confusion when the mortgage holder or servicer receives two checks—the ongoing monthly mortgage payment and a separate payment toward the arrearages.
The most important reasons to always make mortgage payments through the Chapter 13 trustee are accountability and reliability. The standing trustee’s checks never bounce. When there isn’t enough money to pay the ongoing mortgage because the debtor has missed payments to the trustee, the trustee is the first person to know, and the trustee’s computer will spit out a motion to dismiss long before the mortgage creditor or servicer will even know there is a problem. And as the end of the case approaches, the trustee has perfect records from which to determine whether all arrearages have been cured and whether all ongoing payments have been made. No debtor can do these things for him- or herself. The huge volume of litigation between Chapter 13 debtors and mortgage servicers16 is a testament to the stupidity of direct payment of a home mortgage.
Compelling arguments in favor of the payment of home mortgages through the Chapter 13 trustee are found in cases from the Southern District of Texas. The U.S. Court of Appeals for the Fifth Circuit has long supported the payment of home mortgages through the Chapter 13 trustee, especially when the mortgage is in default at the petition.17 Consistent with that circuit court authority, the Bankruptcy Court for the Southern District of Texas enacted local rules that require Chapter 13 debtors to pay ongoing conduit mortgage payments through the Chapter 13 trustee absent court permission to make direct payments.18 In In re Perez,19 debtors challenged the local rule but put on no evidence of need to obtain a waiver. The bankruptcy and district courts gave this review of the history of direct payments in the district and the need for payment through the trustee and offered compelling arguments in favor of conduit payment of home mortgages:
Over the past quarter century . . . debtors in this district have been allowed to make their mortgage and vehicle payments directly to their home and vehicle lenders while also making their plan payments to the trustee. The consequences of this practice have led to an abuse of the system whereby those debtors with insufficient cash flow play the trustee, the mortgage lender, and the vehicle lender against one another by making some payments to each of them in one month and no payments to some of them in another month. The system is broken and needs to be fixed. . . . The principal argument against payment of the mortgages through a Chapter 13 trustee is that debtors must pay the Chapter 13 trustee’s fee for any payments made through the trustee. When one considers the cost to debtors of attorney’s fees from multiple motions to lift stay and motions to dismiss, it is questionable whether the fee to the trustee is actually a greater cost. . . . The argument that the trustee’s fee is a substantial cost to the debtor fails to consider the cost to the debtor of dealing with multiple motions to lift stay, motions to dismiss, and related motions to modify plans, all of which motions are filed much more frequently in those cases where the debtor is making direct payments to the mortgagee. . . . By requiring debtors to make all of their payments through the trustee, debtors will no longer be able to play the shell game.20
[T]he provisions in the Local Rule and Procedures that debtors must make their mortgage payments through the trustee unless the bankruptcy court exercises its discretion to order otherwise do not violate the Bankruptcy Code. The Local Rule and the Procedures are consistent with the long-standing general presumption that a debtor makes monthly payments to the Chapter 13 trustee for distribution, subject to the bankruptcy court’s discretion to allow the debtor to pay creditors directly rather than through the trustee based on the facts of a specific case. . . . “As mortgages are packaged and sold in greater numbers, the record-keeping of the note holders, and their servicing agents, has deteriorated. The absence of accurate records of payment receipts, combined with the endemic failure of consumer debtors to maintain accurate records of their payments, has caused confusion and delay in the prosecution and resolution of motions to lift stay and, in some cases, has resulted in debtors losing their homes because they could not prove that payments have been made.”. . . [R]equiring debtors to use the “trustee as the disbursing agent” minimized such problems, “as trustees typically keep impeccable records,” in contrast to both debtors and mortgage lenders. . . . The bankruptcy court’s analysis of the need for and benefits of a presumption in favor of conduit payments to mortgage lenders in Chapter 13 cases is supported by the existence of similar local rules in other districts, empirical data, and legal research and analysis by bankruptcy law experts. . . . [A]voiding the trustee’s percentage fee cannot be the sole reason for allowing debtors to make home mortgage payments directly.21
The Ninth Circuit has offered mixed messages regarding the rules for when direct payment of a home mortgage is allowed. In a Chapter 12 case, In re Fulkrod,22 the Bankruptcy Appellate Panel for the Ninth Circuit and the Ninth Circuit itself strongly suggested that any “impaired” claim had to be paid through the Chapter 12 trustee. The meaning of “impaired” in this context was not clear, and the issue returned to the Ninth Circuit BAP in the form of the question whether a Chapter 13 debtor could pay directly an ongoing mortgage payment when the mortgage was in default at the petition.
In Cohen v. Lopez (In re Lopez),23 the Ninth Circuit BAP “explained” Fulkrod to mean that the arrearage on a home mortgage in a Chapter 13 case was impaired and must be paid through the standing trustee, but the ongoing mortgage payment was not impaired and could be paid directly by the debtor:
Fulkrod I essentially required Chapter 12 trustees to pay claims that the court referred to as “impaired” by the Chapter 12 plan through the plan, while allowing the debtor to pay directly those claims not impaired by the plan. We hold to that distinction . . . . [A] plan impairs an obligation if it allows or provides for payment designed to cure a default and reinstate a scheduled maturity date after acceleration. . . . Mr. Lopez’s plan thus correctly provides for payment of the mortgage arrears by the Chapter 13 trustee. But Mr. Lopez’s obligations, which mature after his bankruptcy filing, are not impaired by the plan. . . . Under Fulkrod I, they could be paid directly by the debtor outside of the plan. . . . Section 1322(a)(1) does not require that all debts must be paid through the plan; it merely requires that the debtor must submit enough money from his future earnings to “the supervision and control of the trustee” as is necessary to fund the plan. Section 1322(a)(1) says nothing else, though, about what exactly must be paid through the plan. . . . A plain reading of [§ 1326(c)] leads to the conclusion that Congress intended that some debts other than those specifically enumerated in Section 1326(a)(1) could also be paid by the debtor outside of the plan, so long as either the plan itself or the order confirming the plan allows it.24
Not quite three years later, the Ninth Circuit BAP considered the appeal of a Chapter 13 debtor who had been refused permission by the bankruptcy court to make direct payment of a car loan. In Giesbrecht v. Fitzgerald (In re Giesbrecht),25 citing Lopez, the Ninth Circuit BAP stated that Chapter 13 debtors do not have an absolute right to make direct payments of even an “unimpaired” claim but that the bankruptcy court must articulate standards when it refuses a direct-payment plan:
[U]nder the Code, a chapter 13 debtor may directly pay a creditor. . . . The Bankruptcy Code provides no direction as to “when it is appropriate to insert such direct payment provisions in the plan or in the confirmation order.”. . . [B]ankruptcy courts have been afforded the discretion to make the determination of when direct payments may or may not be appropriate based upon the confirmation requirements of § 1325, policy reasons, and the factors set forth by case law, local rules or guidelines. . . . Bankruptcy courts may require that payments be made through the plan based on specific factors or reasons such as administrative efficiency, tracking of payments, fairness and treatment of creditors, and the determination that there is a reduction of plan failure when all payments are made through the plan.26
These quotations from Perez, Lopez and Giesbrecht illustrate that the courts have failed to reach agreement on a set of rules for when direct payment of a home mortgage is okay and when it is not. In the Southern District of Texas, the presumption begins in favor of payment through the standing trustee, and the debtor bears the burden to address 21 factors that could justify an exception for direct payment.27 In the Ninth Circuit under Lopez, the ongoing mortgage payment is considered “unimpaired” notwithstanding that the debtor is in default at the petition, and the ongoing payment can be paid directly by the debtor. But in Giesbrecht, the BAP for the Ninth Circuit limits the Chapter 13 debtor’s right to make direct payments of even an unimpaired claim based on factors such as administrative efficiency, tracking of payments and proof of a reduction in plan failures.
Some jurisdictions discourage or prohibit the payment of a mortgage directly by the debtor when the mortgage is in default and the plan proposes to cure the default.28 In the District of Utah, debtors apparently can pay ongoing payments directly notwithstanding the payment of prepetition arrearages through the trustee but only so long as the contract rights of the mortgage holder are “not altered.”29 The “maturity” of the debt affects availability of the option to pay directly in some courts.30 It is sometimes said that payment through the trustee is required if the plan “modifies” the rights of the mortgage holder or servicer.31 Other courts have concluded that direct payment of home mortgages is just a bad idea—without regard to whether the debt is “modified,” “altered,” “impaired,” “current” or “in default”—based on administrative problems for trustees, high failure rates and the huge litigation costs of dealing with direct-payment plans.32 Other courts have permitted debtors to pay regular mortgage installments directly to a creditor even when defaults are cured through the Chapter 13 trustee and without regard to other considerations.33
Mortgage lenders and servicers sometimes profess to prefer direct payments from the debtor because they claim the debtor is more likely than the trustee to remit by the monthly due date in the contract. As explained above, this argument is refuted in any district with a well-informed trustee. More likely, mortgage lenders and servicers prefer direct payment because they know that debtors can’t keep track of what they pay and when they pay as well as the standing trustee can, and the result of direct payment will be more failed plans, more postpetition late charges and less likelihood that the debtor will be able to sustain an attack at the end of the case with respect to whether the mortgage arrearages have been cured and the ongoing payments made current. The “accounting” from the mortgage servicer’s computer will be the only evidence when a direct-payment debtor gets a foreclosure notice a few weeks after discharge at the completion of payments under a direct-payment plan.
A mortgage holder is still subject to the automatic stay when receiving its regular monthly payment directly from the debtor.34 If the debtor defaults after confirmation, the mortgagee must obtain relief from the stay before it can contact the debtor to find out what is wrong, or proceed against the debtor or against the property.35
Many courts have learned from experience that Chapter 13 plans are rarely successful that provide for direct payment of a home mortgage that is in default. When direct payment is a concealed effort to make no provision at all for the mortgage holder or to provide for the mortgage holder in a manner that is inconsistent with the conditions for confirmation, the courts have refused confirmation or dismissed the Chapter 13 case altogether.36
It is questionable whether a mortgage holder realizes any advantages from direct payment by the debtor. Chapter 13 debtors are not suddenly more reliable in making their monthly mortgage payments. The standing Chapter 13 trustee typically makes disbursements on the same day once each month. The mortgage holder will know within a few days of that day whether the debtor made a full payment to enable the trustee to make full payments to creditors. When all payments are made through the trustee, the mortgage holder can readily determine from the Chapter 13 trustee whether the debtor is meeting all obligations under the plan. If the continuing mortgage payment is made through the trustee and if the debtor fails to make full payments, the trustee becomes an ally in the creditor’s motion for relief from the stay or motion to dismiss.
From the debtor’s standpoint, direct payment of the home mortgage is a really bad idea, particularly if the plan also cures defaults. Direct payment may forfeit the protection of the automatic stay,37 may limit bankruptcy court jurisdiction over postconfirmation disputes between the debtor and a mortgage holder,38 and may preclude discharge of the debt.39 As demonstrated above,40 calculation of plan payments to cure default and maintain a mortgage is not simple. Allocation of incoming payments by the mortgage holder is even more difficult. Mortgage holders paid directly by the debtor too often don’t bother to file proofs of claim, leaving the debtor and the trustee no concrete starting point to account for payments during the years of the plan. Because mortgage servicing often changes several times during the years of the Chapter 13 case, the last hands holding the note won’t have the whole picture. Only the Chapter 13 trustee can be counted on to have a complete and accurate record of everything paid on account of the home mortgage. And the trustee can serve this function only if all payments—regular installments and curing default—are made through the trustee. Without the trustee’s records, the debtor coming out of a Chapter 13 case too often runs immediately into a mortgage foreclosure notice that is difficult and expensive to defend.41 Debtor’s counsel will inevitably be blamed for the problem. Everybody is better off paying the small price for the competence and stability of the trustee’s office.
1 In addition to being discussed below in this section, the general issue of direct payment of secured debt is discussed in § 103.2 [ Direct Payment of Secured Claims by Debtor ] § 74.8 Direct Payment of Secured Claims by Debtor before BAPCPA. Trustee issues with respect to direct payment by debtors are also discussed in § 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise. The impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, 119 Stat. 23 (2005), on direct payment of secured debt is discussed in § 454.2 [ Direct Payment of Secured Debt after BAPCPA ] § 74.9 Direct Payment of Secured Debt after BAPCPA.
2 See §§ 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise and 103.2 [ Direct Payment of Secured Claims by Debtor ] § 74.8 Direct Payment of Secured Claims by Debtor before BAPCPA for discussion of Chapter 13 trustee’s responsibility to make payments to creditors unless the plan or confirmation order provides otherwise.
3 See § 103.2 [ Direct Payment of Secured Claims by Debtor ] § 74.8 Direct Payment of Secured Claims by Debtor before BAPCPA. See, e.g., In re Russell, No. 10-11720-SSM, 2010 WL 2671496, at *6 (Bankr. E.D. Va. June 30, 2010) (Mitchell) (Direct payment by debtor of nonresidential mortgage did not allow plan to avoid five-year limitation in § 1322(d) when plan bifurcated claim and would pay secured portion with interest over 360 months. “The court notes, first, that the statute is not phrased in terms of payments ‘under the plan’ or ‘through the trustee.’ Rather, what the statute says is that the plan ‘may not provide for payments over a period exceeding five years.’ And in any event, simply because payments are not being made through the trustee does not mean they are not being made ‘under’ the plan. If the plan defines the payment terms—and in this case it clearly does—then the payments are being made ‘under’ the plan regardless of whether the debtor pays the creditors directly or pays through the trustee.”); In re Sanford, 390 B.R. 873 (Bankr. E.D. Tex. July 2, 2008) (Parker) (Direct payment of IRS secured claim “outside” the plan is a “murky, amorphous proposal for the treatment of the secured claim that does not identify a schedule for its satisfaction, does not specify the payment of interest as a component to ensure that the present value of the claim is paid, and does not specifically provide for the retention of the lien currently held by the IRS.” Although Foster v. Heitkamp (In re Foster), 670 F.2d 478, 486 (5th Cir. Mar. 1, 1982) (Garza, Randall), permits some direct payments, debtor failed to prove cause for direct payment. Plan is not confirmed.); In re Padilla, 365 B.R. 492, 502 (Bankr. E.D. Pa. Mar. 26, 2007) (Frank) (“Section 1325(b)(5) has two components,” curing of any prepetition defaults and maintaining ongoing payments; maintenance of postpetition payments is element of plan even though payments are to be made directly by debtor. “It follows that a debtor’s contractual postpetition payments are made pursuant to the plan, not outside the plan.”).
4 See 11 U.S.C. § 1326(c) (“[E]xcept as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan.”), discussed in §§ 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise and 103.2 [ Direct Payment of Secured Claims by Debtor ] § 74.8 Direct Payment of Secured Claims by Debtor before BAPCPA. See also § 454.2 [ Direct Payment of Secured Debt after BAPCPA ] § 74.9 Direct Payment of Secured Debt after BAPCPA.
5 See, e.g., the protection from modification in 11 U.S.C. § 1322(b)(2), discussed in § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1 Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.
6 See § 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise.
7 See § 357.1 [ In General, Including Discharge Hearing and Discharge Injunction ] § 162.1 In General, Including Discharge Hearing and Discharge Injunction.
8 See § 308.2 [ Mortgage Claim Issues ] § 138.8 Mortgage Claim Issues.
9 See discussion of trustee compensation beginning at § 54.1 Standard Percentage Fee and Expenses.
10 See § 64.4 [ Compensation on Direct Payments by Debtor ] § 54.6 Compensation on Direct Payments by Debtor.
11 See 28 U.S.C. § 586(e), discussed in § 64.4 [ Compensation on Direct Payments by Debtor ] § 54.6 Compensation on Direct Payments by Debtor.
12 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (June 1, 1993).
13 See §§ 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise, 131.1 [ Postpetition Defaults ] § 82.2 Postpetition Defaults and 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6 Late Charges, Attorneys' Fees, Costs and Other Charges. But see In re Lee, 167 B.R. 417, 426–29 (Bankr. S.D. Miss. Oct. 30, 1992) (Ellington), aff’d, 168 B.R. 319 (S.D. Miss. Aug. 19, 1993) (Lee), aff’d, 22 F.3d 1094 (5th Cir. May 4, 1994) (Davis, Jones, Duhé) (Secured claim holder is not entitled to postconfirmation relief from the stay based on minor discrepancies in payments caused by the timing of payments by debtors’ employers to the Chapter 13 trustee and caused by the payment of administrative expenses during the early months of distributions under plans. “A post-confirmation default must be material in order to constitute grounds for relief from the automatic stay. . . . Green Tree’s argument that the Court should hold the Debtors responsible for the manner in which the Trustee disburses funds is wholly unfounded. . . . Where an administrative expense, such as the debtor’s attorney fee in this instance, is paid in full during the early part of the plan, other creditors necessarily receive less than their designated portion of the total plan payment during these months of preemption. However, once the preempting administrative expense is paid in full, the creditors then receive a monthly amount greater than the amount designated by the plan for a period of time. Assuming the debtor completes the plan, the creditors will receive the appropriate amount over the life of the plan. . . . [T]he Trustee’s office disburses between 10,000 and 15,000 checks to creditors each month. It would be extremely burdensome for the Chapter 13 Trustee to review every contract involving a home mortgage, determine the due date, and pay each individual creditor in accordance with its particular contract. If Green Tree’s argument were accepted by this Court, then the only way a debtor could comply with the Bankruptcy Code would be to pay any secured creditor protected from modification of its rights under § 1322(b)(2) outside of the plan. Such a result is not mandated by § 1322(b)(2).”).
14 See §§ 130.1 [ Prepetition Defaults ] § 82.1 Prepetition Defaults—When is Property “Sold” at Foreclosure? and 131.1 [ Postpetition Defaults ] § 82.2 Postpetition Defaults.
15 See § 133.1 [ Reasonable Time to Cure Defaults ] § 82.4 Reasonable Time to Cure Defaults.
16 See § 308.2 [ Mortgage Claim Issues ] § 138.8 Mortgage Claim Issues.
17 See Foster v. Heitkamp (In re Foster), 670 F.2d 478 (5th Cir. Mar. 1, 1982) (Garza, Randall); Green Tree Fin. Corp. v. Payton (In re Payton), 22 F.3d 1094 (5th Cir. May 4, 1994) (Davis, Jones, Duhé).
18 See Bankr. S.D. Tex. L.R. 3015-1(b) (“Home mortgage payments will be made through the chapter 13 trustee, in accordance with Home Mortgage Payment Procedures. Home Mortgage Payment Procedures shall be procedures adopted by the chapter 13 trustees and approved by the court.”), available at http://www.txs.uscourts.gov/bankruptcy/rulesformsproc/localrules/default.htm.
19 339 B.R. 385 (Bankr. S.D. Tex. Mar. 23, 2006) (Bohm), aff’d, 373 B.R. 468 (S.D. Tex. July 19, 2007) (Rosenthal).
20 339 B.R. at 414.
21 Perez v. Peake (In re Perez), 373 B.R. 468, 470–93 (S.D. Tex. July 19, 2007) (Rosenthal). Accord In re Hodonou, No. 04-82516-G3-13, 2007 WL 760235 (Bankr. S.D. Tex. Mar. 6, 2007) (unpublished) (Letitia Clark) (Deviation from local rule that required ongoing mortgage payments to be paid through trustee unless there is no default at petition date requires justification by debtor with factors identified in In re Perez, 339 B.R. 385 (Bankr. S.D. Tex. Mar. 23, 2006) (Bohm), aff’d, 373 B.R. 468 (S.D. Tex. July 19, 2007) (Rosenthal).).
22 126 B.R. 584 (B.A.P. 9th Cir. Apr. 29, 1991) (Ollason, Russell, Meyers), aff’d, 973 F.2d 801 (9th Cir. Aug. 27, 1992) (Goodwin, Schroeder, Beezer).
23 372 B.R. 40 (B.A.P. 9th Cir. Aug. 3, 2007) (Markell, Brandt, Pappas), aff’d, 550 F.3d 1202 (9th Cir. Dec. 24, 2008) (Noonan, Silverman, Bea) (adopting opinion of BAP).
24 372 B.R. at 47–52.
25 429 B.R. 682 (B.A.P. 9th Cir. Apr. 28, 2010) (Hollowell, Montali, Markell).
26 429 B.R. at 690.
27 See Perez v. Peak (In re Perez), 339 B.R. 385 (Bankr. S.D. Tex. Mar. 23, 2006) (Bohm) (Citing 21 applicable factors, Foster v. Heitkamp (In re Foster), 670 F.2d 478 (5th Cir. Mar. 1, 1982) (Garza, Randall), Chapter 13 debtors are not entitled to relief from local rule that requires payment of home mortgages through the trustee.). See also In re Stonier, 417 B.R. 702 (Bankr. M.D. Pa. Nov. 2, 2009) (Opel) (Applying factors from In re Miles, 415 B.R. 108 (Bankr. E.D. Pa. Apr. 7, 2009) (Sigmund), direct payment of mortgage is permitted when mortgagee consented, debtors were acting in good faith and there was no proof of burden on trustee monitoring, salary or funding.).
28 See, e.g., Foster v. Heitkamp (In re Foster), 670 F.2d 478 (5th Cir. Mar. 1, 1982) (Garza, Randall); In re Carey, 402 B.R. 327 (Bankr. W.D. Mo. Mar. 9, 2009) (Federman) (Motions to allow direct payment of ongoing mortgages are denied consistent with local rule that debtors current on mortgage payments at petition may choose to make ongoing mortgage payments directly or through trustee, but debtors delinquent at the petition must make ongoing mortgage payments through trustee unless court orders otherwise. Record-keeping problems multiply when debtors attempt to make direct payments. Debtors often default, resulting in stay relief motions or other difficulties in plan administration. “[T]he Chapter 13 Trustee testified, and Debtors’ counsel acknowledged that, even if no motion for relief is filed during the case, debtors in Chapter 13 are, with increasing frequency, finishing their cases with a significant deficiency due to changes in payment amounts or fees and charges, which are unbeknownst to them, and end up losing the house shortly after exiting bankruptcy.” Feasibility is often an issue when debtors propose to make direct payments, and debtors have enhanced burden to demonstrate ability to make plan payments and ongoing mortgage payments. Concerns about trustee fees are offset by likelihood of debtors’ “consistently incurring late charges.”); In re Teagardner, 98 B.R. 318, 321 (Bankr. S.D. Ohio Mar. 20, 1989) (Cole) (Local bankruptcy rule requiring “conduit mortgage payment”—payment of home mortgage through the Chapter 13 trustee if the mortgage is in arrears at the petition—“serves the salutary policy of facilitating performance under Chapter 13 plans by debtors who have demonstrated a questionable prepetition payment track record.”); In re Weber, 114 B.R. 194, 198 (Bankr. D. Neb. Sept. 28, 1988) (Minahan) (Citing Foster v. Heitkamp (In re Foster), 670 F.2d 478 (5th Cir. Mar. 1, 1982) (Garza, Randall), and § 1322(b)(5), debtor is prohibited from bifurcating mortgage by curing defaults with payments to the trustee while making current monthly payments directly to the mortgage holder. “[Section] 1322(b)(5) provides for the curing of a default of a mortgage only when the plan also includes the maintenance of the current mortgage payments while the case is pending.”).
29 In re Clay, 339 B.R. 784, 788 (Bankr. D. Utah May 2, 2006) (Thurman) (A Chapter 13 debtor may still choose to pay secured creditors directly so long as those debts are paid pursuant to contract terms, despite changes effected by BAPCPA. The Chapter 13 trustee objected to the debtor’s proposal to pay secured creditors directly. The court found that In re Case, 11 B.R. 843 (Bankr. D. Utah June 10, 1981) (Mabey), was still good law and a debtor may choose to pay secured creditors so long as their rights were not altered. The amendments effected by § 1326 “might even infer that a debtor’s right to pay secured creditors directly is placed even further beyond question.” By requiring debtors to start making payments within 30 days of filing “directly to a creditor holding an allowed claim secured by personal property,” the Code clearly contemplates that the debtor will make payments directly to secured creditors. “It would seem an awkward result if the debtor could make payments directly to secured creditors before plan confirmation but never make such payments after confirmation. The Court believes that, if anything, the changes to § 1326(a)(1) indicate a Congressional intent to allow debtors to continue making payments to secured creditors directly under the terms of the contract.” Although direct payments by a debtor may be subject to challenge on the grounds of good faith or feasibility, there is not a per se rule prohibiting the payment of secured creditors.).
30 In re Smith, No. 07-82462, 2009 WL 937144, at *3 (Bankr. C.D. Ill. Mar. 24, 2009) (unpublished) (Perkins) (Direct payment of a secured debt is permissible when debt extends beyond term of plan, but secured debt that will mature during life of plan is payable through trustee. “The Chrysler claim is for a debt that extends beyond the term of the plan and, as such, is permissibly payable outside of the plan. The Harley debt, however, matures during the plan and is more properly payable through the plan.”).
31 See, e.g., In re Santiago, No. 08-15360-BKC-LMI, 2009 WL 3515705 (Bankr. S.D. Fla. Oct. 29, 2009) (unpublished) (Isicoff) (Citing In re Brown, 244 B.R. 603 (Bankr. W.D. Va. Jan. 21, 2000) (Stone), In re Ford, 179 B.R. 821 (Bankr. E.D. Tex. Apr. 5, 1995) (Sharp), and In re Clay, 339 B.R. 784 (Bankr. D. Utah May 2, 2006) (Thurman), debtor can modify nonresidential mortgage but must pay modified debt through the Chapter 13 trustee.); In re Vigil, 344 B.R. 624, 629–33 (Bankr. D.N.M. June 19, 2006) (McFeeley) (Chapter 13 debtors can pay secured claims directly when debts are not modified and if other requirements for confirmation are satisfied. “The plain language of 11 U.S.C. § 1326(c) is that the plan or the order confirming the plan can ‘otherwise provide’ for payments to creditors under the plan. . . . The code, therefore, does not prohibit direct payments at the same time that it presumes that most payments will be made through the trustee. . . . [C]onfirmation should be granted unless the secured claim the debtor proposes to pay directly outside the plan is modified in some way, or the plan otherwise fails to meet the requirements for confirmation outlined in 11 U.S.C. § 1325(a) . . . . [T]he Debtors need not demonstrate compelling circumstances in order to justify confirmation of a plan that provides for direct payment according to the contract terms to a creditor that is fully secured by personal property provided the Debtors do not otherwise seek to modify the creditor’s claim, and provided that the plan otherwise meets all requirements for confirmation. . . . [T]he Court cannot conclude that BAPCPA abrogated a debtor’s ability to ‘otherwise provide’ for payments under a chapter 13 plan.”).
32 See, e.g., In re Breeding, 366 B.R. 21, 27 (Bankr. E.D. Ark. May 14, 2007) (Mixon) (Although direct payment of secured claim holder is allowed by statute, direct payment is refused as an exercise of discretion in part because of funding problems created by BAPCPA. “By case law a presumption exists that favors distribution by the trustee. . . . A trustee collects no commission on funds that the debtor distributes directly to a creditor . . . and the Debtors in the instant case seek to avoid paying the Trustee’s commission. . . . Permitting debtors to pay creditors outside the plan over the objection of the trustee does potentially jeopardize the operation of the Office of the Chapter 13 Trustee as a self-funded program. After the advent of BAPCPA, the Court takes judicial notice that the rate of case filings has decreased dramatically, thereby reducing the amount of money passing through the office of the Chapter 13 Trustee . . . . New provisions of BAPCPA . . . could combine to produce more confirmable Chapter 13 plans that make no distribution to unsecured creditors, especially for above-median income debtors. . . . [R]equiring payment to be made to the Chapter 13 trustee by debtors produces an audit trail that minimizes debtor-creditor disputes over whether and when a payment has been made. For these reasons, the objection to confirmation on the basis that the Debtors improperly propose to pay Green Tree outside the plan is sustained.”).
33 See, e.g., In re Tartaglia, 61 B.R. 439 (Bankr. D.R.I. May 16, 1986) (Votolato).
34 In re Zambrano, No. 07-20876, 2007 WL 2916161, at *2 (Bankr. D. Utah Aug. 3, 2007) (unpublished) (Thurman) (Interpreting In re Clay, 339 B.R. 784 (Bankr. D. Utah May 2, 2006) (Thurman), direct payment of car claim does not discharge the debt and does not alter creditor’s contract rights; but when plan provides that property remains property of the estate until discharge, automatic stay continues to apply to the creditor. “The Court . . . can find nothing which provides that a claim paid directly is no longer subject to the automatic stay. Clay and [In re Case, 11 B.R. 843 (Bankr. D. Utah June 10, 1981) (Mabey),] stated that a claim paid directly is not subject to discharge or the chapter 13 trustee’s supervision. They did not discuss the impact of direct payments on the automatic stay. Instead, Case and its progeny stated that a creditor paid directly is not subject to a chapter 13 discharge and is not bound by the terms of a confirmed chapter 13 plan. . . . [T]here are important policy reasons for not expanding the reach of Clay and associated case law.”). But see Telfair v. First Union Mortgage Corp., 216 F.3d 1333, 1340 (11th Cir. July 7, 2000) (Tjoflat, Marcus, Kravitch), cert. denied, 531 U.S. 1073, 121 S. Ct. 765, 148 L. Ed. 2d 666, reh’g denied, 531 U.S. 1185, 121 S. Ct. 1173, 148 L. Ed. 2d 1030 (Feb. 20, 2001) (Mortgage holder did not violate automatic stay or discharge injunction by applying payments to attorney’s fees and reimbursement of force written insurance premiums because payments by the debtor directly to the mortgage holder vested in the debtor at confirmation under § 1327(b) and ceased to be protected by the automatic stay. Confirmed plan provided for mortgage under § 1322(b)(5). Debtor was required to make ongoing monthly mortgage payments directly to First Union and “supplemental payments” to the trustee to cure the arrearages. Debtor defaulted in the direct payments after confirmation and First Union three times moved for relief from the stay. Hazard insurance lapsed and First Union force wrote insurance consistent with its contract. Apparently after discharge, First Union reimbursed itself the attorneys’ fees and insurance premiums from the escrow account or from the payments directly by the debtor and/or from the payments by the trustee. The debtor sought sanctions for violation of the automatic stay and of the discharge injunction. With respect to the automatic stay, the Eleventh Circuit concluded that the “estate transformation approach” applied and thus, payments by the debtor directly to First Union were not protected by the automatic stay. “We therefore echo the conclusion of the Seventh Circuit and ‘read the two sections, 1306(a)(2) and 1327(b) to mean simply that while the filing of the petition for bankruptcy places all the property of the debtor in the control of the bankruptcy court, the plan upon confirmation returns so much of that property to the debtor’s control as is not necessary to the fulfillment of the plan.’ In re Heath, 115 F.3d at 524. In this case, after confirmation, only the amount required for the plan payments remained property of the estate. Telfair’s regular loan payments, made outside of the plan, were therefore no longer property of the estate and First Union’s application of a portion of those payments to attorney’s fees pursuant to the Deed did not violate section 362(a).”).
35 See 11 U.S.C. § 362(a)(3), (4), (5), (6). See § 244.1 [ Postconfirmation Default and Relief from the Stay ] § 124.4 Postconfirmation Default and Relief from the Stay. See, e.g., In re Martinez, 281 B.R. 883, 885 n.1 (Bankr. W.D. Tex. Aug. 5, 2002) (Leif Clark) (“In this district, post-petition mortgage payments in chapter 13 cases are the responsibility of the debtor to pay directly to the lender. Only the payments on pre-petition arrearages are included as part of the plan distribution. . . . Also in this district, the property of the estate is not revested in the debtor upon confirmation. . . . This continuation of the estate has the effect of sheltering the debtor and the debtor’s assets with the automatic stay during the life of the plan. This positive protection has a negative side . . . . The lender cannot act to protect itself in the event of a default in the current mortgage payments until the lender gets relief from the automatic stay.” An informal contact by the mortgage holder with the debtor after confirmation to signal a postconfirmation default generates no damages and is not sanctionable under § 362(h).). See also In re Freeman, 352 B.R. 628, 631–32 (Bankr. N.D. W. Va. Oct. 3, 2006) (Flatley) (On debtor’s motion, Capital One Auto Finance can send Chapter 13 debtors monthly statements without violating automatic stay to permit better monitoring of payments directly to Capital One. “These cases present the unusual situation where the Debtors are seeking to waive (partially) the benefit provided to them by the automatic stay, and Capital One—whom is not the intended beneficiary of the stay—is seeking to have the automatic stay remain in place. . . . [T]he court finds Capital One’s ‘undue burden’ argument to be unsupported by the facts and ultimately unconvincing. . . . [T]he court’s ruling does not compel Capital One to send monthly statements as requested by the Debtors. The court is only modifying the automatic stay to permit Capital One to send the Debtor monthly statements to the extent that it may be required to do so by State law—any other collection activity outside the scope of that modification may constitute a violation of the automatic stay for which Capital One might be held accountable under 11 U.S.C. § 362(k).”); Nissan Motor Acceptance Corp. v. Salter (In re Salter), No. 05-28696, 2006 WL 4482000 (Bankr. D. Md. Oct. 2, 2006) (unpublished) (Schneider) (Confirmed plan provided for debtor to pay Nissan Motor Acceptance directly, and debtor’s default is cause for stay relief.).
36 See, e.g., In re Vincente, 260 B.R. 354 (Bankr. E.D. Pa. Mar. 22, 2001) (Sigmund) (Cause for dismissal that plan proposes to treat mortgage holder “outside the plan” by making no provision for payment. Debtor does not have financial ability to pay the mortgage inside or outside the plan, and excluding the mortgage holder from the plan while utilizing the stay serves no valid bankruptcy purpose.); In re Hussain, 250 B.R. 502, 508–09 (Bankr. D.N.J. July 17, 2000) (Lyons) (Debtor cannot conceal that the plan impermissibly both cures default under § 1322(b)(5) and modifies a mortgage for payment beyond the life of the plan by proposing to pay the mortgage “outside” the plan. “[A] chapter 13 debtor cannot modify a claim under a chapter 13 plan and then argue that the claim is being paid outside the plan. Any attempt by a debtor to modify a claim pursuant to § 1322(b)(2), requires compliance with the statutory limitations of § 1322(d).”).
37 See § 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise. See, e.g., Telfair v. First Union Mortgage Corp., 216 F.3d 1333 (11th Cir. July 7, 2000) (Tjoflat, Marcus, Kravitch), cert. denied, 531 U.S. 1073, 121 S. Ct. 765, 148 L. Ed. 2d 666, reh’g denied, 531 U.S. 1185, 121 S. Ct. 1173, 148 L. Ed. 2d 1030 (Feb. 20, 2001) (After confirmation of a plan that required the debtor to make regular mortgage payments directly to the mortgage holder, payments directly to the creditor were no longer property of the estate; because the direct payments were not property of the estate, the automatic stay did not prevent the mortgage holder from applying direct payments to attorneys’ fees and reimbursement of costs and expenses rather than to principal and interest.).
38 See, e.g., Henthorn v. GMAC Mortgage Corp. (In re Henthorn), No. 03-4156, 2005 WL 293646, at *2 (3d Cir. Feb. 9, 2005) (unpublished) (Scirica, McKee, Chertoff) (Debtors cannot challenge oversecured mortgage holder’s charge of $845 for costs and expenses when plan provided that debtors would make payments “outside of bankruptcy” and a year after confirmation the debtors sold the property to satisfy the mortgage. Citing Telfair v. First Union Mortgage Corp., 216 F.3d 1333 (11th Cir. July 7, 2000) (Tjoflat, Marcus, Kravitch), cert. denied, 531 U.S. 1073, 121 S. Ct. 765, 148 L. Ed. 2d 666 (Jan. 8, 2001), “[s]ection 506(b) does not apply here because the debtors excluded the GMAC mortgage obligation from their confirmed bankruptcy plan, and the challenged fees were paid to GMAC from the debtors’ post-confirmation sale of the mortgaged property. . . . Having excluded their contractual relationship with GMAC from the plan . . . plaintiffs cannot later, post-confirmation, invoke § 506(b) and § 105(a) to superintend the ‘reasonableness’ of fees collected by GMAC from the proceeds of the sale of its collateral.”); In re Tomasevic, 279 B.R. 358, 362 (Bankr. M.D. Fla. June 14, 2002) (Corcoran) (When confirmed plan provided that debtor would pay second mortgage “outside the plan,” bankruptcy court was without jurisdiction over postconfirmation action for violations of Real Estate Settlement Procedures Act. Citing Telfair v. First Union Mortgage Corp., 216 F.3d 1333 (11th Cir. July 7, 2000) (Tjoflat, Marcus, Kravitch), cert. denied, 531 U.S. 1073, 121 S. Ct. 765, 148 L. Ed. 2d 666, reh’g denied, 531 U.S. 1185, 121 S. Ct. 1173, 148 L. Ed. 2d 1030 (Feb. 20, 2001), the debtor’s action “concerns post-petition disputes between the debtor and Wilshire that do not impact or impair the court’s administration of the bankruptcy case. . . . [T]hese disputes implicate no issue with respect to property of the estate. . . . Wilshire is not being treated in the plan, and this dispute therefore does not affect the debtor’s payments to other creditors under the plan.”).
39 See §§ 349.1 [ Claims Not Provided for by the Plan or Disallowed under § 502 ] § 158.5 Claims Not Provided for by the Plan or Disallowed under § 502 and 351.1 [ Long-Term Debts ] § 158.7 Long-Term Debts. See, e.g., Mayflower Capital Co. v. Huyck (In re Huyck), 252 B.R. 509, 514 (Bankr. D. Colo. Aug. 21, 2000) (Brooks) (“Another byproduct of the Defendants’ choice to make regular ongoing payments to Community Bank outside of the Plan was that the debt would not be discharged under 11 U.S.C. § 1328(a).” Confirmed plan paid mortgage arrearage through the trustee and the regular monthly payment “outside of the plan.” Bankruptcy court found that the arrearage was provided for under the plan, but the maintenance of regular payments was not provided for under the plan. After the completion of payments and discharge when the debtor defaulted and the mortgage holder foreclosed, the resulting deficiency judgment was a personal liability of the debtor.).
40 See § 80.14 Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations, § 84.1 In General, § 84.2 Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 and § 84.3 Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994.
41 See In re Venuto, 343 B.R. 120, 135 (Bankr. E.D. Pa. June 6, 2006) (Frank) (Consequence of direct payment of mortgage during Chapter 13 case is that debtor will bear burden of proof that postpetition payments are current in the event of dispute with mortgagee; although arrears were paid in full through Chapter 13 trustee and discharge was entered, debtor failed to carry burden of proof that all monthly installments were made directly during Chapter 13 case. “[I]n this district, chapter 13 debtors regularly act as the disbursing agent for the postpetition mortgage payments, which must be made in a plan that invokes § 1322(b)(5). Historically, the discharge order has been entered in chapter 13 cases in this district after completion of the plan payments disbursed by the trustee regardless whether the debtor has paid all of the postpetition payments to a secured creditor under § 1322(b)(5). . . . Not all districts give chapter 13 debtors the option of serving as the plan disbursing agent for postpetition monthly mortgage payments and a debtor obtains a number of benefits by doing so, including a reduction in the amount of the chapter 13 trustee’s statutory commission. The quid pro quo for those benefits is that if a dispute arises, the debtor may have to prove that all of those payments were made as required by the plan.”). See also Kohler v. Astoria Fed. Sav. (In re Kohler), No. 08-146, 2009 WL 2912484, at *3 (Bankr. E.D. Pa. Apr. 22, 2009) (Raslavich) (When plan provided for payment of arrearage on mortgage by trustee but regular postpetition mortgage payments directly by debtor, confirmation did not determine that all postpetition monthly payments had been remitted. “The Debtor’s effort to find in his confirmed plan language which excuses him from making demonstrated postconfirmation/pre-discharge monthly mortgage payments once a discharge order has been entered is a strained, not to mention unfair, reading of the text. The Debtor essentially seems to be looking for a windfall. Simply put, the Court rejects this argument.”).