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In many Chapter 13 bankruptcy plans, debtors state they will make the regular monthly mortgage payments directly to mortgage holders “outside” of the plan.

Does this plan treatment mean that the debtor’s personal liability on the note secured by the mortgage is discharged at the end of the plan? A Florida court recently found such a debt was not discharged.

In In re Park in the MIddle District of Florida, the debtors’ confirmed Chapter 13 plan provided for payments “outside the plan” directly to the holder of the mortgage on their principal residence. After the debtors completed their Chapter 13 plan and received a discharge, the balloon payment on the mortgage became due but was not paid. The mortgage holder filed a foreclosure action and also sought to collect on the underlying promissory note. The issue was whether the debtors’ in personam obligation to the mortgage holder on the note was included in their Chapter 13 discharge.

Judge Caryl Delano found that where a Chapter 13 plan proposes to pay a secured creditor directly outside the plan, this “leaves unaffected” the rights of that creditor under 11 U.S.C. § 1322(b)(2). Thus, the Chapter 13 plan did not “provide for the debt” owed to the creditor, and as a result the debt was not discharged.

The court in Park framed the issue as follows: As set out in § 1328, when a Chapter 13 debtor has completed all payments

under his plan, is he entitled to a discharge of all debts “provided for by the plan?”

Section 1328(a)(1) specifically provides that a debt provided for under § 1322(b)(5) — which permits the curing of arrearages and the maintenance of payments on long-term debt — is excepted from a debtor’s Chapter 13 discharge.

In other words, if a debtor’s plan provides for the cure of any default and maintenance of payments on long-term debt, whether secured or unsecured, the debtor is not discharged from that debt. Section 1328 is silent as to whether a debt “left unaffected” under § 1322(b)(2) is excepted from discharge.

What’s Provided For?

The issue seems straightforward — what is the meaning of the term “provided for by the plan.” Does a Chapter 13 plan “provide for” a mortgage debt when the plan’s only reference to the debt is that it would be paid by debtors outside the plan.

Delano held that since the debtors chose to leave the rights of the bank unaffected, the plan did not “provide for” the bank’s claim, and therefore the obligation to the bank was not discharged.

The court cited the 1993 case Rake v. Wade, in which the debtors split the creditor’s secured claim into two separate claims, one for the underlying debt and the other for the arrearages. The U.S. Supreme Court discussed the meaning of the phrase “provided for by the plan” as used in § 1325(a)(5) and read this phrase to mean “make a provision for” or “stipulate to” something in a plan. The court held that the debtors’ plans “provided for” the arrearages because the plans “treated” the arrearages as a “distinct” claim to be paid during the life of the debtors’ plans according to the payment schedules outlined in the plans.

The debtors in In re Park argued that a Chapter 13 plan’s mere reference to a claim is sufficient for the plan to “provide for the claim,” citing In re Rogers, a 2013 case from the Eastern District of North Carolina. The debtors’ plan proposed to pay the secured mortgage creditor (payments were otherwise current) directly outside the Chapter 13 plan under the terms of the mortgage.

The court held that the creditor’s deficiency claim had been discharged, and the debtors were not personally liable for the deficiency. Citing Rake v. Wade, the court in Rogers adopted a broad view of the term “provided for by the plan” and held that a plan provides for a debt if the plan “deals with” or even “refers to” a particular claim. Thus, according to the Rogers case, the mere reference to a claim in a Chapter 13 plan — even if that reference does nothing more than state that the claim will be paid directly outside the plan — constitutes “provided for by the plan” within the meaning of § 1328(a).

Delano did not follow Rogers’ expansive reading and cited several cases which found that claims paid directly to creditors outside the plan are not provided for by the plan.

The judge concluded: “The mere mention of a creditor in a debtor’s Chapter 13 plan, without more, does not result in that creditor’s claim being “provided for” under the plan. And a Chapter 13 plan that does not modify the rights of a secured creditor under the plan leaves unaffected the rights of that creditor under § 1322(b)(2). If the rights of a holder of a claim are left unaffected, the claim is not discharged. This is the case notwithstanding § 1328(a)’s silence on whether a debt “left unaffected” under § 1322(b)(2) is excepted from discharge.

Finally, even if it were determined that a claim paid “outside the plan” is still “provided for” under the plan, when that claim is “long-term debt” and the plan proposes for the debtor to maintain payments, the claim is provided for under § 1322(b)(5) and excepted from discharge under § 1328(a)(1),” Delano wrote.