Part II examines the legality of a mortgage creditor's attempts at post-closing collection of mortgage-related fees and charges incurred during the pendency of a chapter 13 plan by focusing on (1) the anti-modification provisions for chapter 13 home mortgages, (2) the reasons why mortgage creditors are prohibited from collecting post-confirmation mortgage-related fees and charges during the chapter 13 plan and (3) the applicability of the automatic stay and discharge injunction to the post-petition activity of a mortgage creditor.

To understand the legality of post-confirmation fees and charges assessed by the mortgage creditor, it is helpful to understand how those fees and charges arise. For example, the mortgage creditor of the Winfrees—whose case was detailed in Part I—demanded an additional $967 representing the costs of broker price opinions, recordation fees and attorney's fees, which were purportedly authorized by the underlying note and/or deed of trust. These fees and charges arose notwithstanding the fact that the Winfrees arranged to have both the arrearage on their mortgage and the payment on the long-term mortgage debt paid by the chapter 13 trustee's office. To the extent that post-confirmation fees and charges are not paid through the plan, those fees and charges become part of the creditor's secured claim against the underlying property. Fees and charges can occur in other ways too. As stated by Judge Lundin:

Post-confirmation late charges, escrow account shortfalls, force-written insurance premiums and other contract charges that accrue under a mortgage during a chapter 13 case don't go away at discharge. When the debtor gets a notice of foreclosure almost simultaneously with the discharge, counsel has a tough task to explain why the years of hard work in the chapter 13 case did not produce the advertised relief.²

Thus, after a case is closed, a debtor may be confronted with renewed threats of foreclosure unless the accrued charges and fees—which are now declared to be due—are paid.

Anti-Modification of Home Mortgages

One reason why mortgage-related fees and charges accrue during the pendency of a chapter 13 plan is that Congress prohibits chapter 13 debtors from modifying the terms of the underlying loan documents.³ Also, while a chapter 13 discharge ordinarily eliminates any personal liability on debts, a debtor does not obtain a discharge on long-term mortgage debts that continue beyond the length of the plan;⁴ thus, even though an arrearage may be cured, the secured lien passes through the bankruptcy unaffected,⁵ and the debtor retains personal liability on the note after discharge. Although Congress has tempered the meaning of what it means to modify a home mortgage in other contexts,⁶ nothing in the Bankruptcy Code allows a debtor to eliminate the right of a mortgage creditor to assess fees and charges authorized by state law and the underlying loan documents. Therefore, when a creditor is secured by a chapter 13 debtor's principal residence, any contractual right to assess fees, charges or expenses remains viable against the underlying property even after the chapter 13 discharge is entered.⁷

Prohibition on Collection During the Pendency of Plan

While the chapter 13 case is active, the automatic stay prohibits "any act to...enforce any lien against property of the estate."⁸ What constitutes post-confirmation property of the estate can vary significantly from jurisdiction to jurisdiction. In short, a four-way split exists—each stemming from a different interpretation of §§1306 and 1327(b) of the Code. The four different interpretations may be dubbed "estate termination,"⁹ "estate preservation,"¹⁰ "plan essential,"¹¹ and "empty out and fill up."¹² The continuing applicability of the automatic stay to property of the bankruptcy estate depends on what interpretation a particular jurisdiction has adopted. Many jurisdictions solve the problem by adopting a standing order of confirmation for chapter 13 plans. For example, the standard order of confirmation for the Middle District of North Carolina specifically provides that property of the estate remains property of the estate after confirmation of the plan; thus, the automatic stay remains in effect after confirmation until it is otherwise terminated.¹³ In contrast, when the confirmed plan calls for property of the estate to vest in the debtor on confirmation, no applicable subsection of §362(a) applies to post-confirmation defaults, and the automatic stay does not prevent a mortgage creditor from seeking to collect payment to cure the default.¹⁴

Whatever interpretation a jurisdiction has adopted, a mortgage creditor cannot seek to collect its post-confirmation fees and charges from the underlying property so long as that property remains property of the estate. The only way for the mortgage creditor to collect the mortgage fees and charges is to seek relief from the automatic stay, pay the required fee and convince the court that it should be allowed to foreclose on the property unless its fees and charges are paid. Absent exceptional circumstances, the chances of success are not favorable because a debtor's principal residence is deemed essential to a successful reorganization plan.¹⁵ Also, a chapter 13 case is often filed to preserve equity in the property, which is presumably increasing as the debtor makes timely plan payments and thereby providing a form of adequate protection to the mortgage creditor.¹⁶ Moreover, the bankruptcy court may deny relief from the automatic stay and allow the debtor to pay the accrued assessment through adequate protection payments while the property is under the protection of the automatic stay.

Inapplicability of the Automatic Stay and Discharge Injunction to Post-Confirmation Fees and Charges

Chapter 13 debtors generally attack post-closing demands of a creditor for post-confirmation fees and charges by alleging violations of the discharge injunction and the automatic stay. This section explains why neither is generally applicable.

The automatic stay prevents the mortgage creditor from collecting on assessed mortgage fees and charges during the pendency of the chapter 13 plan—or at least so long as the real property remains property of the estate. The mere assessment of a post-confirmation fee or charge, however, without any effort to collect it from the debtor or property of the estate, does not violate the automatic stay.¹⁷ Accordingly, while a fee or charge may be assessed on the internal books of the mortgage creditor, it cannot be collected from property of the estate—or the debtor—without first obtaining relief from the automatic stay. When property of the estate continues after confirmation then, by operation of law the automatic stay terminates as to the debtor when the debtor receives a discharge and as to the estate when the case is closed.¹⁸ Therefore, when a mortgage creditor makes a post-closing demand for assessments that accrued post-confirmation, the protection afforded by the automatic stay is not applicable.

Likewise, the discharge injunction is not applicable to post-confirmation assessments. A post-confirmation assessment is not encompassed within the discharge injunction because a post-confirmation debt is not provided for in the plan and is not an allowed claim in the bankruptcy case.¹⁹ Furthermore, §1328(a)(1) expressly states that a chapter 13 discharge is not applicable to any debt provided for under §1322(b)(5), which allows for the cure of a home mortgage arrearage.²⁰ In addition, §524(j) of the Code expressly states that the discharge injunction is not applicable to creditors holding a security interest in a debtor's principal residence if the act of the creditor is undertaken in the ordinary course of business and if the "act is limited to seeking or obtaining periodic payments associated with a valid security interest in lieu of in rem relief to enforce the lien."²¹

Therefore, neither the right to bring a civil contempt action for a violation of the discharge injunction nor the private right of action created by the automatic stay will provide any relief to a debtor seeking to eliminate a creditor's assessment of mortgage fees and charges incurred during the pendency of the chapter 13 plan—i.e., post-confirmation—when the mortgage creditor does not undertake any act to collect the assessed fee or charge from property of the estate. Unless a debtor can assert some other cause of action sufficient to invoke bankruptcy court jurisdiction, the debtor is limited to asserting non-bankruptcy causes of action in either state or federal court regarding the propriety of the assessment or collection of those fees and charges.

Footnotes

1 The views expressed in this article are solely those of the author.

2 Lundin, Keith M., 2 Chapter 13 Bankruptcy §131.1 (3d ed. 2004).

3 11 U.S.C. §1322(b)(2). See, e.g., Dewsnup v. Timm, 502 U.S. 410, 420 (1992) (stating that a creditor's valid liens will survive bankruptcy unaffected unless the Bankruptcy Code clearly permits modification).

4 11 U.S.C. §§1322(b)(5), 1328(a)(1) and (c)(1).

5 Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991) ("Ordinarily, liens and other secured interests survive bankruptcy").

6 See 11 U.S.C. §§1322(b)(5), (c).

7 See, e.g., Altegra Credit Co. v. Dennis (In re Dennis), 286 B.R. 793, 796 (Bankr. W.D. Okla. 2002) ("'At best, defendant's plan provision resulted in the discharge of her personal liability to plaintiff in the event she completes the payments called for under her plan. The plan provision in question did absolutely nothing to affect defendant's lien on her home'") (citation omitted).

8 §362(a)(4). See, also, §362(c)(1) ("[T]he stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate..."); In re Lawson, No. 04-20441, 2004 Bankr. LEXIS 740 at *5 (Bankr. E.D. Ky. May 28, 2004) ("[T]he automatic stay's protection of property of the debtor expires upon the granting of a discharge... However, the automatic stay also protects property of the estate, and that protection does not expire until the property is no longer property of the estate...").

9 The "estate termination" approach to interpreting the relationship between §§1306 and 1327(b) is based on the premise that all the property of the estate vests in the debtor at confirmation and there is no more "property of the estate" after that time. See, e.g., In re Petruccelli, 113 B.R. 5, 15-17 (Bankr. S.D. Cal. 1990) (concluding that the automatic stay did not apply to a post-petition levy of a bank account holding the debtor's earnings because the debtor's plan did not postpone revesting under §1327(b) and those funds were not property of the estate after confirmation). The estate termination approach favors post-petition creditors because debtors may dispose of and encumber their property as they see fit, and post-petition creditors may go after that property without running afoul of the automatic stay. Petruccelli, 113 B.R. at 17; In re Dickey, 64 B.R. 3, 4 (Bankr. E.D. Va. 1985).

10 The "estate preservation" approach to interpreting the relationship between §§1306 and 1327(b) is based on the premise that the property "vesting" in the debtor at confirmation does not limit the extent to which that property is also property of the estate. See, e.g., Annese v. Kolenda (In re Kolenda), 212 B.R. 851 (W.D. Mich. 1997) (affirming an order of the bankruptcy court assessing damages for violation of the automatic stay when the debtor had purchased an automobile one year after confirmation, later borrowed money against that automobile and when the creditor repossessed the automobile post-petition without first seeking relief from the automatic stay). The "estate preservation" approach favors pre-petition creditors by limiting the assets, if any, that a post-petition creditor may seize in satisfaction of a post-petition debt without obtaining relief from the automatic stay.

11 The "plan essential" approach takes the position that after confirmation, only plan-essential property remains in the estate, including that part of post-confirmation earnings necessary to fund the plan. See, e.g., Security Bank of Marshalltown v. Neiman, 1 F.3d 687, 691 (8th Cir. 1993) (stating that property and future earnings of the debtor necessary for fulfillment of the chapter 13 plan remain property of the estate after confirmation notwithstanding vesting of property in the debtor under §1327(b)); In re Ziegler, 136 B.R. 497, 500 (Bankr. N.D. Ill. 1992).

12 The "empty out and fill up" interpretation of §§1306 and 1327(b) is self-explanatory. Property of the estate vests in the debtor on confirmation, all property of the estate is emptied out, and then the estate fills back up again with the debtor's post-confirmation earnings and other property consistent with §§541 and 1306. See, e.g., United States v. Holden, 258 B.R. 323 (D. Vt. 2000).

13 11 U.S.C. §§362(c), 1306(a) and 1327(b).

14 See, e.g., In re Petruccelli, 113 B.R. 5, 15-17 (Bankr. S.D. Cal. 1990) (concluding that the automatic stay did not apply to a post-petition levy of a bank account holding the debtor's earnings because the debtor's plan did not postpone revesting under §1327(b) and those funds were not property of the estate after confirmation).

15 See, e.g., In re Raymond, 99 B.R. 819, 823 (Bankr. S.D. Ohio 1989) ("the court concludes that debtors' irregular payment history over approximately the last four months does not, as a matter of law, constitute cause for relief from stay"); In re Elmore, 94 B.R. 670, 677 (Bankr. C.D. Cal. 1988) ("a debtor's principal residence in a chapter 13 case is virtually always necessary to an effective reorganization").

16 An equity cushion by itself may be adequate protection to a creditor and reason to deny a motion for relief from the automatic stay. See, e.g., Orix Credit Alliance v. Delta Resources (In re Delta Resources), 54 F.3d 722, 730 (11th Cir. 1995) (recognizing that an equity cushion affords a secured creditor adequate protection and that the creditor is not entitled to the preservation of the equity cushion ratio inasmuch as "an oversecured creditor's interest in property which must be adequately protected encompasses the decline in the value of the collateral only, rather than perpetuating the ratio of the collateral to the debt"), cert. denied, 516 U.S. 980 (1995) ; Pistole v. Mellor (In re Mellor), 734 F.2d 1396, 1400 (9th Cir. 1984) (finding that the equity cushion standing alone can provide evidence of adequate protection).

17 11 U.S.C. §362(a); Mann v. Chase Manhattan Mortg. Corp., 316 F.3d 1, 3 (1st Cir. 2003) ("these post-petition bookkeeping entries by Chase did not implicate Bankruptcy Code §362(a)(3), since such unilateral accruals of amounts assertedly due, but in no manner communicated to the debtor, the debtor's other creditors, the bankruptcy court nor any third party plainly are not the sort of 'act' Congress sought to proscribe"); Gutling v. Household Financial Services, 312 B.R. 699, 703-04 (Bankr. M.D. Fla. 2004) (holding that there was no violation of the automatic stay when the creditor simply made entries on its internal records that were never communicated to the debtor or otherwise had any effect on the debtor before a discharge was entered); 3 Collier on Bankruptcy |362.03[3][c] (Alan N. Resnick and Henry J. Sommer eds. 15th ed. rev. 2005) ("actions on claims that arise after the commencement of the case are not stayed... However, enforcement of a judgment on a post-petition claim is typically stayed"); cf. Stark v. Crestar Mortg. Corp. (In re Stark), 242 B.R. 866, 872 (W.D.N.C. 1999) ("since Crestar attempted to collect these 'inspection or bankruptcy monitoring fees' from the debtors while the stay was in effect, by adding the fees to the debtors' monthly statements Crestar violated §362(a)(3)").

18 11 U.S.C. §362(c)(2) ("the stay of any other act...continues until the earlier of—(A) the time the case is closed...(C) if the case is a case under chapter...13...the time a discharge is granted or denied"); Henneghan v. Columbia Gas of Va., Inc. (In re Henneghan), No. 05-1220, 2005 Bankr. LEXIS 1770 at *12 (Bankr. E.D. Va. June 22, 2005) ("the automatic stay expires (except as to property of the estate) when the debtor is granted or denied a discharge"); In re Lawson, No. 04-20441, 2004 Bankr. LEXIS 740 at *5 (Bankr. E.D. Ky. May 28, 2004) ("the automatic stay's protection of property of the debtor expires upon the granting of a discharge... However, the automatic stay also protects property of the estate, and that protection does not expire until the property is no longer property of the estate..."); In re Kasper, 309 B.R. 82, 99 n.27 (Bankr. D.C. 2004) ("The debtor's discharge terminates the automatic stay with respect to acts against the property of the debtor...and the automatic stay as to the property of the estate property ceases upon the property becoming property of the debtor...").

19 11 U.S.C. §502. See, e.g., Joubert v. ABN Mortg. Group Inc. (In re Joubert), No. 04-1373, 2005 U.S. App. LEXIS 11424 at *6 (3d Cir. June 16, 2005) ("Joubert alleges that the contested attorney fees were first disclosed in the interim between confirmation and discharge. Therefore, Joubert could not challenge the reasonableness of the $500 charge before the bankruptcy court at the time of the chapter 13 plan confirmation, nor was there a discharge in place to violate when she first learned of the charge, so §524 was not implicated"); Telfair v. First Union Mortgage Corp. (In re Telfair), 224 B.R. 243, 248 (Bankr. S.D. Ga. 1998) ("as the discharge does not affect the [post-confirmation] debt due First Union, the discharge injunction of §524 has no application"), aff'd., 216 F.3d 1333 (11th Cir. 2000). 20 11 U.S.C. §1328(a)(1); In re Chappell, 984 F.2d 775, 780 (7th Cir. 1993) (explaining that a creditor's lien remains intact and survives discharge notwithstanding the treatment of an arrearage claim under §1322(b)(5)). 21 11 U.S.C. §524(j).