Missouri Chapter 13 Plans Must Pay Mortgage Payments Through Trustee; Direct Mortgage Payments for Delinquent Debtors Disallowed

by Craig Andresen, Minneapolis, MN, Bankruptcy Attorney

May 1, 2009

A recent Missouri case held that when drafting a chapter 13 plan for a bankruptcy debtor who is behind on home mortgage payments, the plan may not provide for direct payment of the regular, ongoing monthly mortgage payments by the debtor to the mortgage bank.  Instead, ongoing monthly mortgage payments must be made to the chapter 13 trustee, who then forwards the monthly payments to the mortgage bank.

This case, In re Carey, 2009 WL 613581 (Bky.W.D.Mo. March 9, 2009), confirms a change in longstanding practice in the Western Federal Court District of Missouri, brought about by the implementation of Local Rule 3094-1 on October 1, 2008.  This local rule allows a debtor who is current on mortgage payments to continue paying the mortgage payments directly to the bank, but it denies that option to a debtor who is behind on payments.

The debtor argued that if the mortgage payments were required to be paid through the plan to the chapter 13 trustee, the trustee’s 5.1 percent fee would unfairly increase the cash outlay to pay the monthly mortgage payments.  Also, the debtor would be robbed of flexibility in deciding exactly when to make the mortgage payment each month.

The court was not persuaded by these arguments in cases where the debtor had historically been behind on mortgage payments.  It held that the new local rule should be enforced in such cases, noting that the small 5.1 percent trustee fee, while detrimental in a minor way to chapter 13 debtors, was outweighed by the benefits of having the trustee channel payments to the mortgage banks.

For example, in the past, debtors frequently made ongoing mortgage payments using money orders purchased at convenience stores.  When a mortgage bank subsequently complained to the court about alleged lack of payments, debtors experienced difficulty using money order receipts to prove they had made payments.  This resulted in numerous continuances, while the lawyers for both sides attempted to produce accountings of payments for the court to consider, often with unsatisfactory results.  Using the chapter 13 trustee to make mortgage payments would eliminate these and other accounting disputes.

The court also noted that in cases where the debtor paid the mortgage payments to the chapter 13 trustee, upon successful completion of the plan the debtor could be assured of having a reliable means of proving that all the required mortgage payments had indeed been made, free of late fees or other mortgage bank charges.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.

Last modified: February 20, 2013