The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), analyzing a recent decision of interest:
Analyzing the application of the new Chapter 13 discharge provision passed by Congress on December 27, 2020 as part of the coronavirus emergency response legislation, section 1328(i), a bankruptcy court in the Central District of California ruled that in order to receive a “Covid-19 Discharge”, debtors must still comply with all the other provisions of section 1328 (a)–(h). Meeting only the requirements of section 1328(i) will not result in a discharge. In re Ritter, 2021 Bankr. LEXIS 526, 2021 WL 864092 (Bankr. C.D. CA 3/5/21).
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Debtors James and Debra Ritter filed a chapter 13 petition on July 21, 2019. An order confirming the plan was entered on October 18, 2019. Through a step-up of payments under the plan, over the 60 month applicable commitment period the debtors would pay about $97,000 plus tax refunds, which would result in an approximate 63% payment to their unsecured creditors. The plan provided for the curing of defaults and maintenance of payments on residential mortgages owed to two secured creditors. In June 2020, the second priority mortgagee entered into a temporary forbearance with the debtors due to Covid-19 under the CARES Act. In September 2020 the Chapter 13 Trustee filed a stipulation which suspended plan payments for three months due to Covid-19. Then in January 2021, the court entered an order approving a loan modification between the debtor and the first priority mortgagee.
Believing they complied with the necessary provisions of newly enacted section 1328(i), the debtors filed a motion for discharge. At that time, there were 45 payments remaining in the plan term. The newly-enacted section reads as follows:
(1) IN GENERAL – Section 1328 of title 11, United States Code, is amended by adding at the end the following:
(i) Subject to subsection (d)…the court may grant a discharge of debts dischargeable under subsection (a) to a debtor who has not completed payments to the trustee or a creditor holding a security interest in the principal resident of the debtor if –
(1) the debtor defaults on not more than 3 monthly payments due on a residential mortgage under section 1322 (b)(5) on or after March 13, 2020, to the trustee or creditor caused by a material financial hardship due, directly or indirectly, by the coronavirus disease 2019 (Covid-19) pandemic; or
(2)(A) the plan provides for the curing of a default and maintenance of payments on a residential mortgage under section 1322(b)95); and
(B) the debtor has entered into a forbearance agreement or loan modification agreement with the holder ore servicer…of the mortgage described in sub-paragraph (A).
Debtors argued that because their plan provided for the curing and maintenance of their residential mortgages and they had entered into a forbearance agreement with one secured lender and a loan modification with the other secured lender in accordance with the disjunctive section 1328(i)(2), they satisfied all the requirements of section 1328(i) without doing more and were entitled to a discharge without completing the plan. The Chapter 13 trustee opposed the motion, asserting that debtors still had to comply with all the other conditions for the right to a discharge in provisions (a)–(h) of section 1328. The purpose of the Covid-19 amendment was to allow a discharge under subsection (a) if the only failed requirement was being current on the cure and maintenance payments on the residential mortgages.
After careful analysis, the court agreed with the trustee’s position and denied the motion for discharge.
The court recognized it was writing on a fresh slate; no interpretation of the new statute had been handed down by any court. Therefore, to ascertain Congress’s intent it must follow the customary rules of statutory construction by looking first to the plain language of the statute. If the language is clear, the job is done. If the language is ambiguous, then the court considers extrinsic evidence, including legislative history, public policy and the entire statutory scheme of which the statute is a part. If after doing all that, the meaning remains unclear, the court applies reason, practicality, and common sense to the statute.
Here, the statutory scheme and common sense were the most important factors. The court noted that subsection (i) used the word may grant a discharge, whereas the legislature had used the mandatory shall when speaking of granting a discharge under (a) and not granting a discharge under (c) and (g) if certain circumstances occurred. This distinction in terms was critical, because if Congress wanted the court to only look at compliance with the subsection (i) terms, it would have said shall. The use of may implied Congress expected other factors, such as those found in (a) – (h) to come into play.
In a lengthy analysis, the court also considered the absurdities which would occur if debtors could obtain a discharge by merely show a plan with cures and maintenance provisions and forbearance or modification. First, it would be easier to get a discharge than to do a modification under the Covid-19 modification provisions. Second, if they got a Covid-19 discharge and subsection (c) did not apply, they would be entitled to discharge debt which they could not discharge after full performance of the plan. They could also receive a discharge without doing the financial management course under subsection (g). If Congress had intended such a substantial change, it would have said so more explicitly.
Therefore, the debtors must either complete their plan as confirmed or seek a modification. They did not get to walk away with an easily-achieved discharge.
Of all the factors the court had to consider doing its statutory analysis, the application of common sense was the most important here. Yes, the statutory scheme was important, because the use of shall in some places but the use of may in subsection (i) certainly implied that more was needed for a discharge than just a cure and maintain plan and a forbearance or modification. But most persuasive was common sense. Congress did not intend to give debtors who had lost even minimal amounts of income due to Covid-19 to get a free pass out of chapter 13, with all their debt—including that which would otherwise be nondischargeable—discharged almost 4 years earlier than could have been possible after full payments under the plan. That would defy common sense.
These materials were written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, C.D. CA., ret.), a member of the ad hoc group, with editorial assistance from Adam A. Lewis, Senior Counsel, Morrison & Foerster LLC, a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.