When a Chapter 13 bankruptcy plan has been completed by a debtor, a few steps remain before the bankruptcy is officially discharged. The discharge process includes the filing of the Notice of Plan Completion by the trustee, along with the filing of two forms by the debtor: the Debtor’s Certification of Eligibility for Chapter 12/13 Discharge and the Motion for Entry of Chapter 12/13 Discharge. If the debtor has a mortgage, additional forms are required.
We recently discussed several aspects of bankruptcy with Christopher Holmes and Jess M. Smith, III, partners at Tom Scott & Associates, P.C. The discussion covered several topics, including the means test, the differences between Chapter 7 and Chapter 13, how divorce and child support can affect bankruptcy, and the discharge process. Below is Part 4 of 4 of the transcript of that conversation.
Q: If you’ve filed Chapter 13 and you’ve made all of your payments on-time to the trustee over the course of the three- or five-year plan, what is the next step for the debtor to ensure that everything is legal and the bankruptcy is discharged?
Jess Smith, III: The trustee files a Notice of Plan Completion. Copies of this notice are e-mailed to anyone who receives electronic notification in the case. The debtor then signs a motion for discharge (Motion for Entry of Chapter 12/13 Discharge) and a document stating they’re eligible (Debtor’s Certification of Eligibility for Chapter 12/13 Discharge).
Q: Does the debtor need to go back to their lawyer?
Chris Holmes: Yes. Our paralegal, Margaret, takes care of all of that. She prepares these documents; the debtor comes in and signs them; and we file it. Generally, the debtor receives an order granting discharge.
JS: Typically, the trustee has received all of the money from the debtor and dispersed it out to the creditors. There is one other thing that they sometimes do. If there is real estate involved and the trustee had made any distribution to the creditors whatsoever, the trustee files what’s called the Notice of Final Cure Payment, to which the mortgage companies have a duty to respond, to state they think that the debtor is current on the mortgage or not current on the mortgage. It’s kind of a final chance for the mortgage company to speak up before a Chapter 13 discharge.
CH: We used to have these problems where we’d have people in Chapter 13s and we thought they’d paid all of their mortgage payments and were caught up on what they were behind. They’d get their discharge and then they’d get a notice from the mortgage company stating, for example, they were still two months behind, which would cause all sorts of problems. So the courts came up with this procedure to have the trustees state their belief that the mortgage is current, which shifts the burden to the creditor to come into bankruptcy court and prove otherwise.
JS: Or, the mortgage company would tack on fees, hide the ball, and not tell anybody until discharge. All of sudden they would say, “Well, we charged you $3000 to monitor your bankruptcy. You owe us next week or we’re going to foreclose.”
Q: That’s in the past?
JS: That’s in the past.
Q: So if a debtor has completed the 60-month plan; they’ve paid the trustee on-time each month; they’ve paid their mortgage on-time each month; the trustee will send a notice to the mortgage company?
JS: Yes. And to the debtor.
Q: The debtor takes that notice and brings it back to their lawyer?
CH: We get a copy, so we know at the same time.
Q: So when you receive a copy of the notice sent to the debtor that states they’re eligible for discharge, a paralegal in a bankruptcy law office will do what with that notice?
JS: There are two different documents. The first is the Notice of Plan Completion, which deals with the payments and disbursements to creditors. The second document is the Notice of Final Cure Payment, which strictly relates to the mortgage lenders. When the trustee sends the Notice of Plan Completion, the debtor has to move for discharge. When the trustee sends the Notice of Final Cure Payment, there’s a burden on a mortgage company to file a response, usually within 30 days, stating whether the mortgage is current or not. If a mortgage company doesn’t file one, usually the trustee sets a hearing.
CH: First of all, the debtor gets a discharge, so the rest of the debt that wasn’t paid is wiped out—rendered null and void. And if there’s not a controversy about whether the mortgage is current, there’s an order stating it’s current. That gives the debtor a fresh start, so that the next month they don’t have to worry about the mortgage creditor saying, "Wait a minute. You still owe us $500." When the order is issued, the mortgage company can’t foreclose.
Q: So, if there’s no mortgage, the law office receives a copy of the Notice of Plan Completion. At that point, the law office automatically…
CH: …generates a document to be signed by the debtor that we then file to get them the discharge.
Q: And if there is a mortgage, do you wait 30 days to see if you’ve received back anything from the mortgage company?
JS: Let me give you an example. Normally the mortgage company will say, “We agree the trustee has paid everything that was owed pre-petition,” and either, “We agree they are current,” as of the date they file the response or they say, “No, we disagree and they owe four months of payments,” as an example.
Q: And if the mortgage company ignores the Notice of Final Cure Payment?
JS: If they ignore it, the trustee sets a hearing.
Q: Normally, if the mortgage is current, will the mortgage company respond back as soon as they receive the notice?
JS: Right, But let’s say they either blow it off or they say the debtor is delinquent. If they blow it off, the trustee is going to set a hearing to get an order from the judge.
Q: Does the debtor have to go to the hearing or just the mortgage company?
JS: Typically, you want the debtor there. Here’s an example: In this particular case, the trustee said, “We’ve paid everything we should pay and we think the debtor is current.” But the mortgage company said, “Well, we agree that you paid what was owed prior to filing, but we did an escrow analysis eight months ago, and didn’t tell anybody, and the debtor’s escrow is now short by $700.” So the trustee said there needs to be a hearing on the matter, because it’s not his fault. The trustee was caught in a position of wondering if he needed to go extract money from Visa and MasterCard to pay it on the mortgage, because the mortgage company messed up. We had a couple of hearings on this matter and the mortgage company backed off of its position, stating we’re not going to get the money through the plan. But the judge said that if that mortgage company truly advanced the money, it’s entitled to reimbursement, so you need to work out an agreement. So, we worked out an agreement that states the debtor has six months after the bankruptcy is done to cure the escrow shortage by paying one-sixth of the delinquent amount directly to the mortgage company. As long as the debtor does that, the mortgage company can’t foreclose.
CH: The mortgage creditor has an affirmative duty to tell the trustee how much the regular monthly mortgage payment is to be paid through the plan, so the trustee knows how much to send. Evidently in this case, the mortgage company neglected to say that it needed to increase the payment to make up for that shortfall. The mortgage payment has principal and interest, plus it escrows every month for one-twelfth of the annual taxes and insurance premium.
JS: This was a mess where, after the trustee had made the payments every month for five years, when the case was getting ready to close, the mortgage company sent a letter to the debtor stating, “You need to start making these payments and here is the account number, per the proof of claim.” So the debtor started sending the payments, but they weren’t getting cashed. We finally got to the bottom of it: the account number had changed but the mortgage company did not tell that to anyone. There was a lot of incompetence by this mortgage company.
Part 1 of Conversation: Means Test Helps Determine Filing For Chapter 7 or Chapter 13 Bankruptcy
Part 2 of Conversation: Differences Between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy
Part 3 of Conversation: Divorce and Child Support Can Impact a Bankruptcy