9th Cir. BAP Holds Direct Mortgage Payments are Plan Payments in Chapter 13
In In re Mrdutt, The BAP firmly committed itself to the emerging position that direct payments to creditors are plan payments, and a debtor's failure to maintain them during a plan constitutes material default in plan payments and results in a denial of discharge.
The chapter 13 debtors in this case confirmed a plan that contemplated cure of pre-petition arrears through a loan modification and provided for maintenance of post petition payments via direct payments by debtors outside the plan. The Debtors made it through 60 months of their plan never having received that loan modification and never having made a post-petition mortgage payment to that very lender. They had effected a strip off of a wholly unsecured 2nd deed of trust via their plan. At the end of the case the Chapter 13 Trustee requested the case be closed without discharge because the debtors had not cured their pre-petition arrears. In month 67, the Debtors attempted to modify their plan to "surrender" the property and obtain their discharge.
While this case really centered on the question of whether a Debtor can modify their plan to "surrender" property after the 60 months has run (the answer in this case is a quickly dispatched NO), the court took great pains to explain that direct mortgage payments are plan payments, and that a plan is not complete if these payments are not made. The court clearly embraces the trend to move all jurisdictions to "conduit" plans, where the post-petition mortgage payments get made via the chapter 13 trustee,. They cite the fairness of treating direct payments the same as conduit payments - Debtors should not be able to get away with non-compliance in making direct payments and achieve a discharge if those in conduit plans face dismissal for their non-compliance.
The stress for practitioners is in the not knowing about these defaults until it is too late to resolve through plan modification. The Rule 3002.1 Notice and Responses are not generated until the plan payments are complete. It is not clear whether a preemptive modification to "surrender" the property prior to the 60th month will work to fix the problem, either, as the court seem concerned over a Debtor's not having made mortgage payments and retaining those funds at the expense of unsecured creditors. Practitioners should give thought to issues of bad faith that could be raised in objection to a proposed modification.