§ 162.2     Discharge Injunction and § 524(i) after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 162.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The effects of discharge under § 524 were amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)1 in many ways,2 one of which threatens to affect Chapter 13 practice but without much evidence of actual impact.

[2]

New § 524(i) was the change to the Bankruptcy Code in 2005 that was least characteristic of BAPCPA:

(i) The willful failure of a creditor to credit payments received under a plan confirmed under this title, unless the order confirming the plan is revoked, 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 (including crediting the amounts required under the plan), shall constitute a violation of an injunction under subsection (a)(2) if the act of the creditor to collect and failure to credit payments in the manner required by the plan caused material injury to the debtor.3
[3]

Consistent with much of BAPCPA,4 this new section is internally inconsistent and not simple of interpretation. The new section seems to say that the “willful failure” of a creditor to credit payments received under a confirmed plan “in the manner required by the plan (including crediting the amounts required under the plan)” constitutes a violation of the discharge injunction under § 524(a)(2) unless the confirmation order is revoked, the plan is in default, or the creditor has not received payments required to be made under the plan. A willful failure of a creditor to credit payments received under a confirmed plan, as just described, constitutes a violation of the discharge injunction only if “the act of the creditor to collect and failure to credit payments in the manner required by the plan caused material injury to the debtor.”

[4]

The first part of this new section makes the willful failure of a creditor to credit payments in the manner required by a confirmed plan a violation of the discharge injunction. The second part of the new section requires an additional “act of the creditor to collect” and “material injury” to the debtor. The section could be read to require three conditions before a violation of the discharge injunction arises: willful failure of a creditor to credit payments in the manner required by a confirmed plan; an act of the creditor to collect; and material injury to the debtor.

[5]

A confirmed Chapter 13 plan would satisfy the condition that there be a “plan confirmed under this title.” The three conditions after the word “unless”—that the order confirming the plan is revoked, the plan is in default, or the creditor has not received payments required to be made under the plan—are a bit odd in that if any of these circumstances has occurred, it is not likely that a discharge would be entered in the Chapter 13 case. For example, if the order confirming the plan is revoked, the debtor will not become entitled to a discharge and § 524—dealing with the effects of discharge—would not be at issue. Because revocation of confirmation is time restricted to the 180 days after the entry of the confirmation order,5 it is rare that confirmation could be revoked after entry of discharge.

[6]

It is conceivable, but unlikely, that new § 524(i) would apply even if no discharge has been entered. To get there, a court would have to conclude that a willful failure of a creditor to credit payments received under a confirmed plan “shall constitute a violation of an injunction under subsection (a)(2)” if all the conditions in § 524(i) are present and without regard to whether a discharge has actually been entered in the case under § 1328(a) or (b). This would be a strained interpretation of new § 524(i). One reported decision suggests that § 524(i) could apply to a mortgage holder that misapplied payments in a Chapter 13 case in which the mortgage will not be discharged at the completion of payments.6 Other courts have concluded that § 524(i) does not apply unless and until the debtor receives a discharge.7

[7]

More likely, § 524(i) will apply only after discharge, and then some or all of the words immediately after “unless” become a curiosity. It is possible that a creditor “has not received payments required to be made under the plan” notwithstanding that the debtor has completed payments and is entitled to or has already received a discharge under § 1328(a) or (b). In that circumstance, the new section is not clear whether the “willful failure” to relate to payments that were “received” by the creditor in a manner other than as required by the plan or whether any distribution at variance with the plan excuses any other willful failure to properly credit payments.

[8]

If the plan is in default, it is conceivable that a debtor would request and receive a hardship discharge under § 1328(b) and the default would then become a defense in a § 524(i) action with respect to a creditor’s failure to credit payments received under the confirmed plan in the manner required by the plan. Notice that a default under the plan seems to relieve the creditor of exposure for a willful failure to credit payments without regard to whether the default interrupts required payments to the creditor. The conditions that the plan is not in default and that the creditor has received payments required to be made under the plan are disjunctive.

[9]

The requirement that the failure to credit payments be “willful” could be a significant barrier to recovery under new § 524(i). Typically, the word “willful” means intentional and in this context a willful failure would be an intentional failure to credit payments in the manner required by the plan. Some notice or knowledge of the “manner required by the plan” would be a likely predicate to a finding of willful failure under new § 524(i). A creditor’s choice to credit payments received under a confirmed plan in a manner different from the manner required by the confirmed plan would constitute a willful failure for purposes of § 524(i).

[10]

It is not obvious what the parenthetical “(including crediting the amounts required under the plan)” adds to the immediately prior phrase, “in the manner required by the plan.” As a matter of sentence construction, the parenthetical may relate back to the opening clause, in which case it further defines “willful failure” rather than the protective provision about payments not received. There are at least commas missing here and the omissions make for guesswork that could be material.

[11]

The new section does not reveal what “act” of the creditor to collect triggers potential liability under new § 524(i) except to say that the act together with the failure to credit payments must cause “material injury” to the debtor. Would the expenses, including attorneys’ fees, of an action against the creditor for contempt for violation of the discharge injunction constitute “material injury” for § 524(i) purposes? If the failure to credit payments in the manner required by the plan is quickly corrected by the creditor, can the debtor still show material injury caused by an act by the creditor to collect? Why isn’t a violation of the discharge injunction itself a material injury?

[12]

There are obvious defenses for the creditor in new § 524(i). Proving that the failure to credit payments in the manner required by the plan was not “willful” would be a defense. A creditor charged with willful failure to properly credit payments will look for a default under the plan and will audit the payments received to show that the creditor did not receive payments that were required to be made under the plan. New § 524(i) provides no remedy in the absence of an “act of the creditor to collect.” Perhaps “material injury” can be limited or eliminated by expeditious and comprehensive corrections in response to the motion for contempt—at least requiring the debtor to mitigate damages. There is no suggested measure of damages in new § 524(i) other than the phrase “material injury.” If contempt is the appropriate remedial action by the debtor, then the creditor’s exposure under new § 524(i) is bounded only by the limits on contempt proceedings.

[13]

The convoluted wording of new § 524(i) is fundamentally suspicious. It would have been simple to draft a provision of the Bankruptcy Code that required creditors to correctly credit payments received under confirmed plans and that provided debtors a reasonable remedy if a creditor failed to do so. New § 524(i) starts in that direction but then trips itself with conjunctive, disjunctive and dislocated internal conditions and requirements. The result is that new § 524(i) is an illusory remedy for a significant problem in Chapter 13 practice.

[14]

There has long been a problem that creditors have trouble accurately accounting for payments received from trustees and debtors in Chapter 13 cases.8 Foremost, when the Chapter 13 plan manages a defaulted home mortgage, it is common that the confirmed plan cures default and makes regular contract payments in amounts that are not exactly what the mortgage holder or mortgage servicer expects.9 The passage of time or other events contemplated by loan agreements that happen during Chapter 13 cases change the required monthly payments—especially when taxes, insurance and other escrow accounts are involved. Payments from the trustee and payments directly from debtors become mixed up on the books of the mortgage servicer and mistakes are made.10 Often.

[15]

Chapter 13 debtors have difficulty remedying this situation, especially after completion of payments under a plan. Too often Chapter 13 debtors get a foreclosure notice in the mail about the same time as the discharge at the completion of payments under their Chapter 13 plan. The books and records of the mortgage holder or mortgage servicer are difficult to decipher and contempt of the discharge injunction has not proven an effective remedy for Chapter 13 debtors.11

[16]

Nationwide dissatisfaction with the performance of mortgage lenders and mortgage servicers in Chapter 13 cases12 and failed efforts to negotiate “best practices” for the management of home mortgages through Chapter 13 plans13 have inspired debtors’ attorneys and Chapter 13 trustees to experiment with provisions in plans that require mortgage creditors to apply payments correctly, to give notices of changes in payment terms and to address whether the mortgage is current at or near the completion of payments under the plan.14 When the Chapter 13 plan contains mortgage management provisions, the first-line objection to confirmation from the mortgage creditor is that the provisions for application of payments, notices or determination of currency are inconsistent with the contract rights of the lender and thus violate the prohibition against modification in § 1322(b)(2).15 New § 524(i) has been drawn into this debate in interesting ways.

[17]

Some courts have found tension between the antimodification provision of § 1322(b)(2) and the potential liability for violation of the discharge injunction in § 524(i). As stated by the bankruptcy court in In re Anderson,16 a debtor’s § 524(i) right to have payments properly credited by a mortgage holder must be balanced against the protection from modification in § 1322(b)(2): “Section 524(i) provides a remedy. It does not dictate what is permissible under a Chapter 13 plan. Rather, that task is governed by §§ 1322 and 1325.”17 The Anderson court cautioned that only provisions that accurately restate § 524(i) are eligible for inclusion in a confirmable plan.

[18]

Mortgage creditors have argued that enactment of the statutory remedy in § 524(i) precludes a Chapter 13 plan from including analogous requirements or conditions in advance of eligibility for discharge. The bankruptcy court in In re Jackson18 explained that § 524(i) does not preclude plan provisions, for example, that declare mortgage arrearages cured at the completion of payments under the plan:

[Section] 524(i) already provides a remedy for a debtor materially injured as a result of a secured creditor’s failure to credit payments in the manner required by the confirmed plan. But it is only available after the debtor obtains a discharge. . . . Moreover, it does not address the problem of hidden fees and charges. . . . This Court finds that the Mortgage Provisions are permissible and that they serve a useful purpose. They do not impermissibly modify the rights of the mortgage holders or the terms of the underlying mortgages. They simply provide a procedural framework for the Debtors to find out whether they are emerging from bankruptcy with a current mortgage, or whether any undisclosed and potentially impermissible fees and charges have been assessed.19
[19]

At the other extreme, one bankruptcy court rejected a plan provision that a mortgage creditor must “comply fully with the provisions of 11 U.S.C. § 524(i)” based on the conclusion that it can’t be assumed prospectively that a creditor will not comply with the law.20 Providing in a plan that a creditor must comply with § 524(i) “results in ambiguity with respect to whether the affirmative defenses contained in that section are still available to the creditor.”21

[20]

Several courts have addressed whether § 524(i) supports specific plan provisions that manage the relationship between the Chapter 13 debtor and a mortgage creditor, and the conclusions are not all of one mind. For example, the bankruptcy court in In re Patton22 found that § 524(i) was not independent authority for “best practices” provisions in a plan that would manage payment of a home mortgage:

I am not persuaded that [§ 524(i)] authorizes the proposed plan language at issue; it merely provides debtors with a post-discharge remedy in the event a creditor willfully fails to credit payments received under a confirmed plan. The statute, with the remedy it provides, refers specifically to a violation of the injunction under 11 U.S.C. § 524(a)(2), which would not go into effect until after successful completion of the plan, but it has nothing to do with plan provisions.23
[21]

In contrast, other courts have cited § 524(i) as support for plan provisions that control how mortgage payments and arrearage payments will be applied. For example, in In re Emery,24 the plan required arrearage payments to be applied to arrearages, “deemed” prepetition arrearages current at confirmation, required ongoing mortgage payments to be applied to the month in which they were made and required mortgage holders or servicers to notify the trustee and the debtor of changes in interest rate or escrow payments. Citing § 524(i), the bankruptcy court was not concerned that the new remedy was not available until completion of payments:

The court agrees with the Debtor that the phrase “credit payments received . . . in the manner required by the plan” contemplates that a debtor will craft plan language which directs the application of payments. When the remedy . . . for failure to comply arises is not the issue.25
[22]

Something like new § 524(i) is badly needed in Chapter 13 practice. As written, new § 524(i) makes the willful failure to correctly credit payments a violation of the injunction in subsection (a)(2) of § 524. Section 524(a)(2) provides that a discharge “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not such discharge of such debt is waived.”26 Section 524 does not provide a remedy for violation of the injunction described in subsection (a)(2). Presumably, to enforce new § 524(i), the debtor would bring an action for contempt for violation of the discharge injunction. That action might be brought in the bankruptcy court and might require reopening the bankruptcy case if the case has been closed.


 

1  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

2  Most of the changes to 11 U.S.C. § 524 involve the content and enforceability of reaffirmation agreements that are rarely seen in Chapter 13 practice. See 11 U.S.C. § 524(k).

 

3  11 U.S.C. § 524(i).

 

4  See § 3.10  Nine: Malice or Incompetence?.

 

5  See 11 U.S.C. § 1330(a), discussed in § 224.1 [ Revocation of Confirmation ] § 117.3  Revocation of Confirmation.

 

6  See In re Hudak, No. 08-10478-SBB, 2008 WL 4850196, at *10–*11 (Bankr. D. Colo. Oct. 24, 2008) (unpublished) (Brooks) (Plan that imposes § 524(i) requirements when mortgage will not be discharged at completion of payments does not impermissibly modify mortgagee’s rights under § 1322(b)(2) and is consistent with legislative history of § 524(i). “[T]he Debtor’s . . . Plan is designed to compel compliance with a confirmed plan and force transparency and proper accounting by Creditor. The Court concludes that 11 U.S.C. § 524(i) does apply to this Creditor. . . . [A]ny creditor having a claim secured by an interest in real property who is misapplying payments may potentially be liable under 524(i). . . . [S]ection 524(i) and companion section 524(j), in the context of section 524, appear as stand-alone provisions within section 524. That is, violation or exclusion from violation is not dependent upon whether the debt will be or is discharged. In other words, whether the debt is discharged or not under 11 U.S.C. § 1328(c)(1) is irrelevant to liability under section 524(i).”).

 

7  See, e.g., Myles v. Wells Fargo Bank, N.A. (In re Myles), 395 B.R. 599 (Bankr. M.D. La. Oct. 15, 2008) (Dodd) (Section 524(i) does not apply before discharge because of internal reference to § 524(a)(2); therefore, complaint against Wells Fargo does not state claim for relief under § 524(i) when debtors have not yet received discharge. Plaintiffs may have contract claims for violations of confirmed plans.).

 

8  Reported decisions documenting this problem are legion. See §§ 287.2 [ Documentation and Assigned Claims ] § 135.3  Documentation and Assigned Claims, 308.2 [ Mortgage Claim Issues ] § 138.8  Mortgage Claim Issues and 357.1 [ In General, Including Discharge Hearing and Discharge Injunction ] § 162.1  In General, Including Discharge Hearing and Discharge Injunction.

 

9  See 11 U.S.C. § 1322(b)(5), discussed in § 81.1  Overview: General Rules for Saving Debtor’s Home, § 83.1  In General: Rake and Contracts before October 22, 1994, § 83.2  Section 1322(e): Contracts after October 22, 1994§ 83.3  Rate of Interest to Cure Default: Contracts before October 22, 1994, § 83.4  Rate of Interest to Cure Default: Contracts after October 22, 1994, § 83.5  Undersecured Mortgage and Interest to Cure Default, § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges, § 84.1  In General§ 85.1  Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994, § 85.2  Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994, § 85.3  Prepetition Foreclosure Judgment: Curing Default, Payment in Full or Modification under § 1322(c)(2)?, § 85.6  Direct Payment of Mortgage or Payment by Trustee and § 138.8  Mortgage Claim Issues.

 

10  See § 308.2 [ Mortgage Claim Issues ] § 138.8  Mortgage Claim Issues.

 

11  See § 357.1 [ In General, Including Discharge Hearing and Discharge Injunction ] § 162.1  In General, Including Discharge Hearing and Discharge Injunction.

 

12  See §§ 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman, 308.2 [ Mortgage Claim Issues ] § 138.8  Mortgage Claim Issues and 357.1 [ In General, Including Discharge Hearing and Discharge Injunction ] § 162.1  In General, Including Discharge Hearing and Discharge Injunction.

 

13  See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

14  See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

15  See 11 U.S.C. § 1322(b)(2), discussed in § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

16  382 B.R. 496 (Bankr. D. Or. Feb. 12, 2008) (Radcliffe).

 

17  382 B.R. at 503.

 

18  No. 09-15137 EEB, 2009 WL 5943245 (Bankr. D. Colo. Aug. 31, 2009) (unpublished) (Brown).

 

19  2009 WL 5943245, at *5.

 

20  In re Booth, 399 B.R. 316, 328 (Bankr. E.D. Ark. Jan. 14, 2009) (Taylor).

 

21  399 B.R. at 328.

 

22  Nos. 08-23038, 08-024709, 07-28262, 2008 WL 5130096 (Bankr. E.D. Wis. Nov. 19, 2008) (unpublished) (McGarity).

 

23  2008 WL 5130096, at *2. Accord In re Collins, No. 07-30454, 2007 WL 2116416 (Bankr. E.D. Tenn. July 19, 2007) (unpublished) (Stair) (Section 524(i) creates a violation of the discharge injunction when a creditor willfully fails to credit payments received under a confirmed Chapter 13 plan, but new subsection does not support language in plan that is inconsistent with rights of holder of claim that is protected from modification by § 1322(b)(2); plan that specifies how and when mortgage holder may credit payments is measured against § 1322(b)(2), not § 524(i).).

 

24  387 B.R. 721 (Bankr. E.D. Ky. May 16, 2008) (Howard).

 

25  387 B.R. at 724.

 

26  11 U.S.C. § 524(a)(2).