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Does the Phrase "Payments Provided for Under the Plan" Include Direct Payments Outside the Plan?

Updated: Feb 25

Does the Phrase “Payments Provided for Under the Plan” in Bankruptcy Code § 1328(a) Include Direct Payments to Lenders Outside a Debtor’s Plan? A Debtor’s Chapter 13 Discharge May Hinge on the Meaning of that Phrase.

Once a chapter 13 debtor has completed all “payments provided under the plan” the debtor will obtain a discharge as to all debts “provided for by the plan.” 11 U.S.C. § 1328(a). Why did Congress choose these words and what should be made of the distinction? The comparable provision under chapter 7 is crystal clear. A chapter 7 discharge applies to all debts that arose before the date of the order for relief…”, i.e., all debts that were incurred before filing bank

ruptcy. 11 U.S.C. § 727(b). Things can get complicated in a Chapter 13. First, debts may be incurred post-petition that are addressed in the plan. Second, some of the most common obligations can be paid outside the plan (e.g., rent payments on a lease or mortgage payments on a mortgage).

So, when has the chapter 13 debtor completed “payments provided under the plan” to make him/her entitled to a discharge and which debts discharged as having been “provided for by the plan”?

This issue was addressed in In re Heinzle, 511 B.R. 69 (Bankr. W.D. Tex. 2014). In Heinzle, the debtors’ plan provided for pre-petition arrears to be cured under the plan but for regular mortgage payments to be paid directly to the lender outside the plan. Pursuant to Federal Bankruptcy Rule 3002.1, near the conclusion of the plan repayment term the mortgage lender notified the court that the debtors has failed to make the direct post-petition mortgage payments, thus triggering the trustee’s motion to dismiss the chapter 13 without entry of discharge. In response, the debtors contended discharge should be entered as the installment payments to the lender were to be paid directly by the debtors and thus, not “payments provided for under the plan” otherwise constituting a prerequisite to discharge. Heinzle held post-petition mortgage payments are payments made under the plan, regardless how a plan is written (i.e., whether payments made outside the plan or through the trustee), and the debtors’ failure to maintain such payments is grounds for dismissal, conversion and/or denial of discharge. Heinzle, 511 B.R. at 80.

A number of courts (by far the majority) have addressed the same issue and agreed with Heinzle. See e.g., In re Coughlin, 568 B.R. 461, 474 (Bankr. E.D.N.Y. 2017) (“payments” per § 1328(a) include direct payments by the creditor); In re Kessler, 655 F. App’x. 242, 244 (5th Cir. 2016) (when the plan provides for curing mortgage arrears and direct maintenance payments, both fall “under the plan per § 1328(a) because both relate to the same claim); In re Foster, 670 F.2d 478 (5th Cir. 1982); In re Downey, 580 B.R. 168, 172-73 (Bankr. D.S.C. 2017) (regular mortgage payment outside the plan are deemed “under the plan”).

Two recent cases have departed with Heinzle on this issue:

· In re Gibson, 582 B.R. 15, 24 (Bankr. C.D. Ill. 2018); and

· In re Rivera, 599 B.R. 335, 339-42 (Bankr. D. Ariz. 2019).

Judge Perkins noted the following in support of his decision in Gibson: (1) the meaning of “provided under the plan” is ambiguous, and there’s general policy resolving ambiguities in favor of a debtor’s right to discharge. at pg. 4; (2) “Rule 3002.1 was not intended to serve as the impetus for dismissal without discharge…”; and (3) Denial of discharge at the debtor’s stage of plan payments would create a harsh result under the circumstances. Rivera was decided for similar reasons.

Although no case in the Western District of Washington has addressed the issue, the 9th Circuit Bankruptcy Appellate Panel did so in In re MrDutt, 600 B.R. 72 (9th Cir. BAP 2019). In MrDutt, the question was whether the plan was “complete” for purposes of § 1329(a) to determine whether the court had jurisdiction to modify the confirmed plan. The trustee maintained that only payments to the chapter 13 trustee are “payments under the plan” and that plan payments are “complete” once the debtor has made all plan payments to the trustee. The court was asked to determine what “payments under the plan” means under § 1329(a). Since it could find no authority on the meaning of such phrase under § 1329(a), it examined the meaning of the same phrase as it is used under § 1328(a). MrDutt, 600 B.R. at 77. The latter comes up in the context of debts that are discharged as opposed to last date by which the debtor may modify the plan.

The BAP explored Heinzle and is progeny, as well as Rivera and Gibson. While the court was sympathetic with the court’s desires in Rivera and Gibson to avoid the harsh results of discharge denials, it concluded the legal reasoning behind those decisions was flawed. Among other things, MrDutt noted the Gibson/Rivera rationale would produce disparate results depending on whether a debtor filed its case in a conduit district (direct payments outside the plan to the creditor are not permitted – all payments must go through the chapter 13 trustee), or non-conduit district (direct payments outside the plan to creditor are permitted).

MrDutt held: “While Gibson and Rivera are thoughtful and well-intended decisions, we respectfully disagree….One is the different outcomes that would result in conduit versus non-conduit jurisdictions….whether post-petition mortgage payments are paid directly by the debtor or paid by the chapter 13 trustee should not be dispositive of granting a discharge under § 1328(a). A direct-pay debtor should not receive a discharge that a conduit debtor would not… Accordingly, we join the overwhelming majority of courts holding that a chapter 13 debtor’s direct payments to creditors, if provided for in the plan, are “payments under the plan for purposes of a discharge under § 1328(a)…Id. at 80 (emphasis added).

Given the jurisprudence on the issue, it is very likely if/when the Seattle Bankruptcy Court would follow the MrDutt court’s lead on this issue.

In re Heinzle, 511 B.R. 69 (Bankr. W.D
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In re Mrdutt, 600 B.R. 72 (9th Cir
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