Debtors Denied Discharge for Failure to Make Mortgage Payments Outside Plan

Debtors whose chapter 13 plan included a provision for curing mortgage arrears through the plan with regular mortgage payments paid outside the plan, are not entitled to discharge when they fail to keep up with the mortgage payments. Kessler v. Wilson (In re Kessler), No. 15-40 (N.D. Tex. Nov. 19, 2015).

After making all required payments to the chapter 13 trustee, the Kesslers moved for discharge. Though the trustee did not object, the bankruptcy court denied discharge due to the Kesslers’ failure to maintain their mortgage payments outside the plan.

The Kesslers argued that because their mortgage payments were covered by the cure and maintain provision of section 1322(b)(5) the debt was not subject to discharge under section 1328(a)(1), and therefore their failure to keep up with the mortgage payments outside the plan should not be an impediment to discharge. They argued that the bankruptcy court’s decision to deny discharge created an equitable requirement not predicated on any provision of the Code.

The district court disagreed. The case examined whether mortgage payments made outside the plan are nonetheless “payments under the plan” within the meaning of section 1328(a). Relying on Foster v. Heitkamp, 670 F.2d 478 (5th Cir. 1982), the court found that they are. In Foster the Fifth Circuit declined to confirm a plan in which the mortgage arrears were to be paid through the plan and the regular mortgage payments were to be paid outside the plan. The case turned on the court’s finding that when a mortgage is dealt with under section 1322(b)(5) all payments that come due during the pendency of the case are necessarily “under the plan.”

The court also rejected the Kesslers’ argument that under United Student Aid Funds v. Espinosa, 559 U.S. 260 (2010), the mortgage lender’s failure to object to discharge amounted to waiver of the issue. Espinosa involved a creditor’s attempt to void a discharge in order to lodge an objection that it had failed to address during the pendency of the case. The Espinosa Court was persuaded that refusal to reopen was not error in part because the lender was on notice of the legal error made during the case and did not object. The district court held that, contrary to the Kesslers’ contention, Espinosa did not stand for the proposition that absent objection the bankruptcy court was compelled to grant discharge even where all plan payments had not been made.

See also In re Ramos, No. 10-33561 (Bankr. N.D. Tex. Nov. 13, 2015) (explaining the rule from Kessler as: a debtor who makes all plan payments to the trustee but fails to “make direct, ongoing mortgage payments that are contemplated by the confirmed plan, as part of the debtor’s intention to cure and maintain her mortgage” is not entitled to discharge due to failure to complete all payments under the plan).

Kessler ND Tex opinion