Arizona Bankruptcy Court Makes Chapter 13 Discharge Easier for Debtors Behind on Mortgage Payments

In the majority of bankruptcy courts across the country, when a Chapter 13 bankruptcy is near its close, the debtor must show that they have not only paid off any mortgage arrears that were supposed to be paid off through the Chapter 13 Plan but also show that they are current on their mortgage monthly payments that arose after filing as well.

Thankfully, the Bankruptcy Court for the District of Arizona recently joined a minority of courts in finding that a debtor could obtain a discharge even where there was a delinquency in post-petition mortgage payments.

The court addressed the issue of whether payments on a mortgage paid directly to the mortgage holder and referenced in a chapter 13 plan are “payments under the plan” for purposes of 11 U.S.C. §1328(a) and if delinquent is a legitimate basis to dismiss the bankruptcy and deny a discharge. The court went on to find that mortgage payments not paid directly to the Arizona Chapter 13 Trustee but to the mortgage holder were not “payments under the plan.”

Section 1328(a) states in relevant part: “as soon as practicable after completion by the debtor of all payments under the plan,… the court shall grant the debtor a discharge of all debts provided for by the plan…” Similarly 11 U.S.C. § 1307(c)(6) allows a trustee to file a motion to dismiss for cause including “material default by the debtor with respect to a term of a confirmed plan;…” As a consequence, many chapter 13 trustees file motions to dismiss if they discover that a debtor is delinquent in mortgage payments.

The Court concluded that Debtors’ failure to pay all their direct post-petition mortgage payments was not a failure to complete all payments required under the plan. Though the obligation to make ongoing mortgage payments may have been referenced in the Chapter 13 Plan that did not mean that they were payments under the Plan. Having completed all required plan payments and performed all other obligations under the Code and Rules and there are no indicia of wrongdoing, Debtors were entitled to a discharge.

This is obviously great news for Phoenix area Chapter 13 filers who may have made all their plan payments but have fallen behind on a mortgage payment or two during their Plan. The last thing any debtor, coming to the end of a chapter 13 plan, but trying to work out a refi or sale of their home needs is to lose their discharge for a debt that wasn’t a part of their repayment plan. Way to go Arizona!

If you have any questions about mortgages and chapter 13 please let us know. Chapter 13 bankruptcy is often an excellent tool when you can’t catch up on your payments. Chapter 13 bankruptcy is a great way to stop foreclosure in its tracks, giving you the ability to catch up on your payments over the course of several years.