Editor's Note: Part I was published in the May 2006 issue and Part II was published in the June 2006 issue of the ABI Journal.

With an understanding of how post-confirmation fees and charges can arise and why no attempt to collect those fees and charges is generally made until after a debtor's bankruptcy case is closed, the question becomes this: What, if anything, can a debtor do to prevent an unmanageable demand for payment after the chapter 13 case is closed? This section examines (1) attempts to use §506(b) to limit the amount assessed, (2) attempts to use §524(i) to force a recalculation of amounts allegedly owed, (3) directly paying the creditor or including post-confirmation defaults into the terms of a confirmed plan and (4) providing language in a confirmed plan to deal with post-confirmation assessments.

Section 506(b) Reasonableness

Attempts by debtors to reduce or eliminate a secured creditor's fees and charges assessed pursuant to an underlying mortgage note and deed of trust usually occur within the context of 11 U.S.C. §506(b). In general, §506(b) allows an oversecured creditor to add "reasonable" fees, charges and interest to its secured claim.² "Unreasonable" fees and charges are generally bifurcated from the creditor's secured claim and remain an unsecured claim against the estate.³

Importantly, in the context of determining the amount of a secured creditor's claim, three distinct time periods exist: (a) pre-petition, (b) post-petition and pre-confirmation, and (c) post-confirmation. A mortgage creditor's pre-petition lien already includes pre-petition interest and attorney's fees. Post-petition and pre-confirmation is the time period to which §506(b) and its reasonableness standard applies.⁴ Post-confirmation is when—at least in theory—all claims are set and when all that remains is execution of the plan. Also important to remember is that §506(b) only applies where the creditor is oversecured; no similar debtor protection is applicable to the fees and charges assessed by an undersecured creditor.

Some authority exists for using the reasonableness standard of §506(b) to limit the amount of fees, costs or charges that a home mortgage creditor may add to its secured pre-petition claim.⁵ The Bankruptcy Code, however, has two prohibitions against using §506(b) to modify the rights of an oversecured creditor in a debtor's principal residence.

First, §1322(e) of the Bankruptcy Code expressly precludes the application of §506(b) in regards to the amount needed to cure a mortgage arrearage claim.⁶ Second, chapter 13 debtors are expressly prohibited from modifying the underlying terms of a mortgage note secured by the debtor's principal residence.⁷ At least one court has determined that the §506(b) reasonableness standard applies notwithstanding these prohibitions.⁸ Apart from the cannon of statutory interpretation dictating that the more express anti-modification provisions of §§1322(b)(2) and 1322(e) trump the more general provisions of §506(b),⁹ the logical anomaly in this position is easy to spot. In short, §506(b) only applies to oversecured claims. Because §506(b) does not apply to undersecured claims, the §506(b) reasonableness standard would not be available to eliminate or reduce the fees and charges assessed by an undersecured creditor that would otherwise be prohibited for the oversecured creditor. To keep the property after the case is closed, the debtor must pay those fees and charges regardless of whether or not the mortgage creditor is under or oversecured.

Accordingly, §506(b) does not have any application to the post-confirmation fees, costs or charges assessed by the mortgage creditor that is secured by the debtor's principal residence.

Section 524(i) Proper Allocation of Plan Payments

Enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), §524(i) of the Bankruptcy Code grants a debtor a cause of action against a mortgage creditor for "[t]he willful failure...to credit payments received under a plan confirmed under this title, unless...the plan is in default, or the creditor has not received payments required to be made under the plan in the manner required by the plan...."¹⁰

Two elements of this newly created cause of action are immediately apparent. First, the failure of a mortgage creditor to credit plan payments must be "willful." In other contexts, the term "willful" has an established meaning. For example, in stay violation cases under §362(k), a "willful violation of the stay" is one that is done "deliberately with knowledge of the bankruptcy petition."¹¹ A "willful injury," as the term is used in the context of an exception-to-discharge case under §523(a)(6), requires more than an intentional act that leads to an injury; rather, it requires that the party must have intended the consequences of the act.¹² Exactly how the term "willful" will be interpreted in the context of §524(i) is yet to be determined.

Second, for a cause of action to be successful, the creditor must not only receive payments required to be made under the plan, but must also receive them in the manner required by the plan. The cause of action will not arise until the plan is completed. When a debtor makes a late payment under the confirmed plan, or makes additional payments to the trustee to "catch-up" a missed or prior partial payment without officially obtaining modification of the confirmed plan, then—arguably—all payments were not made in a manner required by the plan. Given the high rate of chapter 13 defaults, and the fact that a substantial number of chapter 13 plans that were previously three years in length will now be five years in length, the cause of action provided by §524(i) may not be available to many debtors.

In any event—even if that cause of action is available to a debtor after the completion of the plan—post-confirmation assessments are generally not debts provided for by the plan. Section 524(i), however, may provide a debtor with some measure of relief in certain cases. For example, if a mortgage creditor assesses a post-confirmation late fee for a payment received under the plan, in a manner provided for by the plan, then the debtor may have a strong argument that the late fee ought not to have been assessed. On the other hand, the mortgage creditor could argue that it did not violate the payment application provision because it applied the payment as directed; the underlying loan documents authorized the assessment of the late fee.

Direct Pay or Including Post-Confirmation Defaults in a Confirmed Plan

Although the automatic stay prohibits a creditor from attempting to collect on debts against property of the estate during the pendency of a chapter 13 plan, nothing would prevent the debtor from contacting the creditor to determine if any post-confirmation assessments exist. One court has even prospectively approved an "innocent notice" procedure whereby a creditor may inform a debtor of a post-confirmation assessment.¹³ Other jurisdictions may have adopted local rules to deal with the issue.¹⁴ However, while §524(j) states that the discharge injunction is not violated by a creditor that sends notices to a debtor after the discharge is entered regarding amounts due under a valid security interest in lieu of pursuing in rem relief to enforce the lien, no similar provision exists in §362(b) to excuse creditor communications with the debtor from constituting a violation of the automatic stay.

Outside of an "innocent notice" or a direct-pay procedure, there are three methods generally used to bring payments on a post-petition mortgage assessment under the swaddling of the Bankruptcy Code: pre-confirmation modification, post-confirmation modification or adequate protection.

When a mortgage creditor assesses fees and charges and declares them to be due after a chapter 13 petition is filed and before confirmation of the chapter 13 plan, a debtor could add the additional sum to the creditor's secured claim to be paid under the plan. A debtor is expressly entitled to modify the proposed plan at any time before confirmation.¹⁵ Moreover, §1322(b)(5) allows a plan to cure any default, which has been interpreted to include post-petition defaults.¹⁶ Additionally, Congress specifically allows oversecured creditors to include as part of their pre-petition claim any assessment that accrues post-petition and pre-confirmation. Of course, §1322(e) curtails the use of §506(b) to eliminate or reduce the amount necessary to cure the default assessed pursuant to the underlying loan documentation, but nothing in that section otherwise eliminates the use of §506(b). Practically, a home mortgage creditor's proof of claim will often already include any post-petition assessments simply because that claim is not required to be filed until 90 days after the meeting of creditors, and creditors usually include the total amount payable as of the date the claim was filed, even if the post-petition assessment has not been previously been declared to be due.¹⁷

If the assessment occurs after confirmation, however, the propriety of a debtor including that post-confirmation assessment in the confirmed plan pursuant to a modification¹⁸ is more tenuous because §§1323 and 506(b) are not applicable in the post-confirmation context and because confirmation is a significant event in a case inasmuch as the rights of the parties are generally fixed and—in theory—all that remains is the execution of the confirmed plan. A post-confirmation default is a new debt. Some courts have forbidden the cure of post-petition defaults through a confirmed plan,¹⁹ while others have allowed it.²⁰

A debtor's post-confirmation alteration of a confirmed plan is limited to the grounds set forth in §1329. Subsection 1329(a)(1) allows a plan modification to increase or reduce the amount of payments on claims of a particular class provided for by the plan. The debt secured by a home mortgage is a claim provided for in the plan, but the particular post-confirmation assessment is not. Indeed, the post-confirmation assessment may not even be due. Absent some other authority for adding post-petition claims to a plan—such as §§506(b) or 1305—the term "claim" generally refers to the pre-petition claim submitted by the creditor.

Authority for adding post-confirmation assessments to a confirmed plan through a modification is generally found in §1322(b), which is specifically applicable to modifications.²¹ Read together, §§1322(b) and 1329 provide that a plan modification may cure any "default."²² The term "default"may be specially defined by the loan documents, but in general terms a "default" means "the failure to pay a debt when due."²³ Careful attention should be paid to the loan documents to determine if an assessment is due at the time the assessment is made even though it is not communicated to the debtor, in which case a strong argument may be made that a default exists that is subject to being cured through a modification, or whether the lender has the option to declare an assessment to be due, in which case there might not be any default subject to being cured through a modification.²⁴

Also, post-petition claims are specifically dealt with in chapter 13 cases under §1305. Under that section, an entity holding a post-petition claim may file a proof of claim if the debt is a consumer debt that arises post-petition and that is for property or services necessary for the debtor's performance under the plan.²⁵ However, it is the election of the creditor—not the debtor—to file a post-petition claim and to participate in the chapter 13 plan.²⁶

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[C]hapter 13 debtors have little or no legal basis under the Bankruptcy Code for protesting the post-closing collection of fees and charges assessed by a mortgage creditor secured by a lien or the debtor's principal residence during a debtor's chapter 13 plan.

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Moreover, an issue exists over whether a bankruptcy court would even have jurisdiction over post-confirmation mortgage assessments when the mortgage creditor does not undertake any act to collect amounts due until after the case is closed. Most bankruptcy plans do not provide treatment for claims that have not yet come into existence; thus, a close nexus to a confirmed plan may be lacking. Likewise, it is difficult to see how a post-confirmation assessment—that by necessity is not a debt treated in the confirmed plan—could affect the interpretation, implementation, consummation, execution or administration of that plan when that assessment is not declared to be due until after the case is closed.²⁷ On the other hand, when a mortgage creditor declares a post-confirmation assessment to be in default and seeks relief from the automatic stay to foreclose on that default, or when the loan documents provide that an assessment is due and payable once entered on the creditor's books, a close nexus to the confirmed plan is present, §1322(b) may be applicable, other rights arising in or under the Bankruptcy Code are invoked, and consequently, bankruptcy court jurisdiction over the post-confirmation default exists.

Absent exceptional circumstances, a home mortgage creditor is likely to agree to have any post-petition assessments paid through a debtor's chapter 13 plan. The assessment is not subject to modification under the Bankruptcy Code; it continues to be secured by the debtor's principal residence regardless of when it arises, and if the debtor wishes to obtain a discharge of debts other than the long-term mortgage debt, all payments under the plan will be made. Likewise, if a post-confirmation assessment is added to a confirmed plan under §1322(b)(5), then that debt is not subject to discharge.²⁸

Even if a court does not allow post-confirmation assessments to be cured through a plan modification under §1329, it may nonetheless be possible to pay the assessment under the guise of adequate protection should the creditor bring a motion for relief from the automatic stay. For this to happen, however, the creditor must first declare the amount to be due—which may consequently trigger any right to cure under §1322(b). Practically, however, once a home mortgage creditor files the motion for relief, the debtor will have the opportunity to pay the amount due considering that—absent exceptional circumstances—a debtor's home is not likely to proceed to foreclosure based on a post-confirmation fee, charge or default when the debtor proposes a cure.

Treatment of Nonexistent Post-Confirmation Claims in a Confirmed Plan

The U.S. Bankruptcy Court for the Northern District of Illinois has included in its standard confirmation order a procedure to bring any home mortgage post-confirmation assessment before the bankruptcy court for adjudication.²⁹ If a plan proposes to cure a pre-petition home mortgage default, then (1) within 30 days of the final payment of the cure amount, the chapter 13 trustee is to provide notice to the mortgage creditor that the cure has been paid and that the mortgage is "fully current unless the debtor has failed to make timely payments of post-petition obligations;" (2) if unpaid post-petition fees and charges exist, then the mortgage creditor is to provide an itemized statement of those amounts with the court; (3) if the itemized statement is not filed, then the post-petition fees and charges are waived; and (4) if an itemized statement is filed, then the debtor may challenge the fees and charges in a contested matter and propose a modification of the plan to cure legitimate amounts due.³⁰

When these plan provisions were challenged as violating the anti-modification provision of §1322(b)(2), the bankruptcy court held that merely providing a procedural framework within which to ascertain what a debtor owes, and within which to enforce those rights, did not violate §1322(b)(2).³¹ The parties did not appear to argue that the confirmation order violated §1322(b)(2) on the basis that it altered the applicable state statute of limitations, which by necessity was part of the mortgage contract.³² While it is true that a confirmed plan binds the debtor and each creditor,³³ it is also true that a confirmed or modified plan must comply with the provisions of title 11, which includes the anti-modification provisions of §1322(b)(2).³⁴

Other than forcing a mortgage creditor to declare a post-confirmation assessment to be due, there is no practical difference between this plan provision and proposing a post-confirmation modification to add a post-petition default to be paid under the plan. Practically, the confirmation order is a boon to debtors because it affords the debtor the framework to pay legitimate post-confirmation assessments under the protection of their pending case, it forces the creditor to act in a timely manner on penalty of waiver, and it obviates the need for a debtor to incur additional expenses in filing a new chapter 13 case to deal with the debt, if appropriate.³⁵

Conclusions

In sum, chapter 13 debtors have little or no legal basis under the Bankruptcy Code for protesting the post-closing collection of fees and charges assessed by a mortgage creditor secured by a lien or the debtor's principal residence during a debtor's chapter 13 plan. To attack the validity of a post-confirmation assessment by a mortgage creditor, the debtor is largely left to local bankruptcy court rules or an interpretation of the underlying contract and state law—rights that exist in the absence of any bankruptcy filing.

 

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Footnotes

1 The views expressed in this article are solely those of the author.

2 11 U.S.C. §506(b); Rake v. Wade, 508 U.S. 464, 475 (1993) (holding that an oversecured creditor is "entitled to pre-confirmation and post-confirmation interest on arrearages paid off under petitioners' plans"), superceded by 11 U.S.C. §1322(e) (eliminating post-confirmation interest on a home mortgage arrearage - which itself might include pre-confirmation interest—so long as it was not permitted by the underlying loan documents or state law).

3 See, e.g., Welzel v. Advocate Realty Investments, LLC (In re Welzel), 275 F.3d 1308, 1318 (11th Cir. 2001) (explaining that §506(b) does not deny a creditor's claim; it only affords a certain portion of an allowed claim secured status under §502; "if a portion of the fees are deemed unreasonable, however, the fees should be bifurcated between the reasonable portion, treated as a secured claim, and the unreasonable portion, treated as an unsecured claim").

4 Section 506(a) expressly sets the amount of the creditor's allowed secured claim as the extent to which its interest is secured in estate property. 11 U.S.C. §506(a). In most cases, a secured creditor's claim is determined as of the date the debtor files bankruptcy. §502(b) (stating that if an objection to a claim is made, the court "shall determine the amount of such claim...as of the date of the filing of the petition..."). Section 506(b) then allows the claim—if it is oversecured—to accrue post-petition interest and reasonable, post-petition fees, costs or other charges. 11 U.S.C. §506(b). Section 506(b) is widely held not to apply in the post-confirmation context. See, e.g., Rake v. Wade, 508 U.S. 464, 471 (1993) ("[A]s the parties acknowledge, [§506(b)] interest accrues as part of the allowed claim from the petition date until the confirmation or effective date of the plan"), superceded on other grounds by 11 U.S.C. §1322(e);4 Collier on Bankruptcy |506.04[2] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2004) ("§506(b) has no application to a secured creditor's entitlement to postconfirmation interest [fees and charges]"). But see Welzel v. Advocate Realty Invs., LLC (In re Welzel), 275 F.3d 1308, 1314-15 (11th Cir. 2001) (applying §506(b) to both pre-petition and post-petition attorney fees).

5 In re Gray, 182 B.R. 15, 16-17 (Bankr. W.D. Va. 1995) (holding that a court may deny fees due to a creditor secured by the debtor's principal residence under §506(b) because there was no equity in the collateral; the Bankruptcy Code is to be liberally construed in favor of the debtor; modification of the creditor's rights was not done pursuant to the plan, but was done pursuant to another bankruptcy statute, and applying §506(b) post-confirmation did not contravene the policy behind §1322(b)(2), which was to protect the home mortgage market). Although decided in 1995, Gray does not discuss §1322(e), which was only added to the Bankruptcy Code in 1994 and which may not have been applicable to the case.

6 §1322(e) ("notwithstanding...§506(b)...if it is proposed in a plan to cure a default, the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law"); Smiriglio v. Hudson United Bank, 98 Fed. Appx. 914, 915 (3d Cir. 2004) (unpub.) ("while the relationship of §506(b) and §1322(e) has not been extensively considered by the courts, every bankruptcy court to consider the matter appears to have agreed or assumed that 'when a debtor seeks to cure a pre-petition payment default over the life of a chapter 13 plan...the amount of the arrearage must be 'determined in accordance with the underlying agreement and applicable nonbankruptcy law,' as provided under §1322(e)"), quoting In re Plant, 288 B.R. 635, 641 (Bankr. D. Mass. 2003).

7 11 U.S.C. §1322(b)(2).

8 In re Gray, 182 B.R. at 16-17.

9 Missouri v. Ross, 299 U.S. 72, 76 (1936). See, e.g., In re Hayes, 111 B.R. 924, 928 (holding that §1322(b)(2) allows the accrual of interest on undersecured claims between the petition and confirmation dates—notwithstanding §506(b)—because §1322(b)(2) is the more specific provision).

10 11 U.S.C. §524(i).

11 Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773, 775 (8th Cir. 1989).

12 Kawaauhau v. Geiger, 523 U.S. 57, 60, 61-62 (1998).

13 In re Martinez, 281 B.R. 883, 887-89 (Bankr. W.D. Tex. 2002). The Martinez court opined that in many instances, damages for violations of the automatic stay are nonexistent; the court approved an example of an "innocent notice" when a creditor did not receive a post-confirmation monthly payment: Dear: According to our records, your monthly mortgage payment is $ . Also, according to our records, we have not received your mortgage payment for the month of _____, which was supposed to have been received by _____. If our records are in error, either you or your attorney should contact us at [furnish telephone number] so that we can correct our records. If our records are correct, however, either you or your attorney should promptly contact us to see about bringing your mortgage current. Id. at 888.

14 See, e.g., Local Bankruptcy Rule 4001-1(b), U.S. Bankruptcy Court for the Middle District of North Carolina ("in chapter 13 cases, affected allowed secured creditors may inquire of the debtor in writing of the following: 1. the status of insurance coverage... 2. whether insurance premiums are paid directly by the debtor; 3. the location, inspection and appraisal of the collateral; and 4. the status of direct payments...").

15 11 U.S.C. §1323.

16 §§1322(b)(3), (5) (stating that a plan may provide for the curing of any default); Greentree Acceptance, Inc. v. Hoggle (In re Hoggle), 12 F.3d 1008, 1010 (11th Cir. 1994) ("§1322(b)(5) permits cure of any default whether occurring prior to the filing of the petition or subsequent to confirmation of the plan").

17 Fed. R. Bankr. P. 3002(c).

18 11 U.S.C. §1329 (allowing plan payments to a class of creditors to be increased).

19 In re Nicholson, 70 B.R. 398, 401 (Bankr. D. Colo. 1987) (asserting that §1322(b)(2) and (5) do not allow a chapter 13 plan to modify the rights of a creditor holding a claim secured only by a mortgage on the debtor's principal residence except to cure pre-petition defaults within a reasonable time).

20 Mendoza v. Temple-Inland Mortg. Corp. (In re Mendoza), 111 F.3d 1264, 1268 (5th Cir. 1997) (ruling that the bankruptcy court committed reversible error by failing to allow modification of a plan to cure a post-petition arrearage reasoning that §1325(b)(5) expressly authorized a plan to provide for the curing of any default, notwithstanding the anti-modification provisions of §1322(b)(2)).

21 11 U.S.C. §1329(b)(1).

22 §1322(b)(5).

23 Black's Law Dictionary 449 (8th ed. 2004).

24 See Harris v. First Union Mortg. Corp. (In re Harris), No. 96-14029, 2002 Bankr. LEXIS 771 at *16-18 (Bankr. S.D. Ala. 2002) (rejecting a creditor's argument that the assessment of attorney's fees did not constitute a "default" on the basis that the creditor's fees should have been disclosed under §506(b)).

25 11 U.S.C. §1305.

26 See, e.g., In re Sims, 288 B.R. 264, 267 (Bankr. M.D. Ala. 2003) (reaching the result because (1) §1329 governs modifications proposed by the debtor; (2) §1305 claims are provided for in a plan under §1322(a)(6), claims not allowed under §1305 cannot be provided for in a plan; (3) if claim is not filed by a creditor under §1305, there can be no allowed claim; and (4) §1305 uses permissive language and does not give the debtor the option to force a post-petition creditor into a pre-existing chapter 13 plan ); In re Haith, 193 B.R. 341, 342 (Bankr. N.D. Ala. 1995) ("if a debtor or the trustee could file proofs of claims for post-petition debts that would be paid through existing chapter 13 plans, the cases and the plans they represent would be perpetual. Neither the Bankruptcy Code nor the Bankruptcy Rules allow a debtor to force a post-petition creditor into an existing chapter 13 plan. If a post-petition creditor desires to participate in the existing plan and meets other criteria, a post-petition claim may be filed with and, depending on the facts, allowed or disallowed by the court").

27 See supra, note 13 and accompanying text.

28 11 U.S.C. §1328(a)(1), (c)(1); Telfair v. First Union Mortg. Corp., 216 F.3d 1333, 1337 n.8 (11th Cir. 2000) ("§524 clarifies that a discharge voids any conflicting judgments on discharged debt and bars any future claim for discharged debt. The bankruptcy and district courts found these provisions inapplicable to the post-confirmation attorney's fees sought by First Union because (1) they were not provided for under the plan, (2) they were not disallowed under §502 and (3) they would be excludable in any event under §1322(b)(5)").

29 In re Wilson, 321 B.R. 222 (Bankr. N.D. Ill. 2005).

30 Id. at 224.

31 Id. at 225.

32 Home Bldg. & Loan Asso. v. Blaisdell, 290 U.S. 398, 429-30 (1934) ("'the laws which subsist at the time and place of the making of a contract, and where it is to be performed, enter into and form a part of it, as if they were expressly referred to or incorporated in its terms. This principle embraces alike those which affect its validity, construction, discharge and enforcement'") (citation omitted).

33 11 U.S.C. §1327(a).

34 §§1322(b)(2); 1325(a)(1); 1329(b)(1).

35 See, e.g., In re Rodriguez, 225 B.R. 628, 634 (Bankr. S.D. Tex. 1998) ("if modification were not allowed, a debtor might dismiss the case and file a second case to include the unsecured creditor in the second plan discharging the debt. There would be no reason to require dismissal and a new bankruptcy filing to achieve the same result as might be achieved merely by plan modification"); contra, In re Moore, 247 B.R. 677, 684 (Bankr. W.D. Mich. 2000) ("while such a procedure [dismissal and refiling] appears burdensome when compared to the alternative [modification] which debtors advocate, the court will not succumb to the siren song of expediency as the rationale for ignoring the clear language of §1329").