Achieving Aims of Bankruptcy by Allowing Direct Payments under Chapter 13

By: Renton Persaud

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

In a decision of importance to chapter 13 debtors, the Bankruptcy Appellate Panel for the Ninth Circuit in In Re Lopez

[1]

held that chapter 13 debtors are permitted to pay post-petition mortgage payments directly to creditors outside of the plan even though the plan cures and reinstates the mortgage.  According to the court, the new provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) do not change the law with respect to such direct payments.

[2]

  The court drew a distinction between claims “impaired” by the debtor’s plan, which must be made through the chapter 13 trustee, and unimpaired claims, which need not be.

[3]

 The court bifurcated the mortgage debt between the cure payments and the regularly scheduled payments accruing post-petition.  Under the court’s view, only the cure amount was impaired and must be paid through the plan.

[4]

  The importance of the decision to debtors is that it avoids the chapter 13 trustee’s fee on the regular mortgage payment, an amount that was $308 per month in this case.

[5]

  Of special interest in light of the currently pending legislation that could permit modification of home mortgages in chapter 13, the court distinguishes Fulkrod v. Barmettler (In re Fulkrod)

[6]

and indicated that, where the mortgage is reamortized, as in chapter 12 cases, the payments must be made through the plan.

[7]

 

The issue of whether debtors, especially chapter 13 debtors, can act as disbursing agents has been a contentious one for quite some time. Prior to BAPCPA it was the general understanding by a majority of courts that whether or not debtors can directly pay their secured creditors rested in the discretion of the bankruptcy courts.

[8]

However, a minority of courts adopted a more restrictive approach.  Although recognizing the court’s discretion to allow direct payments, under this view, direct payments should be the exception and not the general presumption.

[9]

Since BAPCPA was enacted in 2005, the question posed has been: whether the changes to the Bankruptcy Code made by BAPCPA have any effect on direct payments by debtors. The decisions thus far have maintained the same underlying holding that debtors are still allowed to make direct payments.

[10]

There are some courts however, who, despite recognizing the right of debtors to make direct payments, still consider it the exception and not the rule.

[11]

 

There are competing policy reasons set forth by the courts. Some courts oppose direct payments and place strict restrictions on the situations in which they allow direct payments, while other courts openly allow direct payments as a matter of public policy. Courts opposing direct payments believe that the trustee is better equipped to keep track of payments. On the other side of the equation, courts favoring direct payments have stated that public policy dictates that direct payments be allowed because prior to the institution of their chapter 13 plans, the debtors made their own mortgage payments and at the end of the plan they would have to do so once again, and requiring them to switch back and forth would be asking too much. Direct payment discussions implicate 11 U.S.C. §§ 1322

[12]

and 1326

[13]

, which govern the contents of plans and payment requirements under chapter 13. Although these sections both provide for the debtor to remit payments to the chapter 13 trustees, neither precludes the debtor from making direct payments. On the contrary, section 1326 states that “except as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan.”

[14]

Since the language in this section clearly allows for an exception to the trustee making the payments, all courts have held that direct payments are allowed, even those courts that do not favor them.

 

The holding in In re Lopez is of importance to anyone owning a home, especially today, considering the current mortgage crisis. One of the two aims of bankruptcy is to make the debtor whole again by providing a fresh start. If this aim is to be realized, then direct payments seem the most rational idea because it saves debtors additional expenses. This is so because the debtor pays the trustee a fee for all payments made under the plan and, by making payments directly the debtor can avoid paying part of that fee (courts vary as to their views on the validity of direct payments as a means of circumventing the trustee fee). By not paying this trustee fee, the debtor, who is in bankruptcy in the first place because he cannot repay his debts, might have more funds available to repay other debts while still maintaining his mortgage and thereby keeping his home.