(Unpublished) - In re Formaneck, Case No. 10-20070 MER; Order entered July 13, 2015 (Material default of confirmed Chapter 13 Plan; conversion versus dismissal under 11 U.S.C. § 1307(c))

The Court confirmed the Debtors' sixty month Chapter 13 plan ("Confirmed Plan"), which included provisions to cure a prepetition mortgage default through payments to the chapter 13 trustee ("Trustee"), and to make post-petition mortgage payments directly to the mortgage creditor outside the Confirmed Plan. The Debtors completed all payments to the Trustee, and cured the prepetition arrears. However, the notice process under Fed. R. Bankr. P. 3002.1 revealed the Debtors' failure to make over thirty mortgage payments directly to the secured creditor. The Debtors never sought any modification of their Confirmed Plan, and the Trustee filed a motion to dismiss the case under 11 U.S.C. § 1307(c).

The issues before the Court were whether the Debtors' failure to make post-petition payments directly to the secured creditor is a "material default" by the Debtors with respect to a term in their Confirmed Plan, and if so, whether dismissal or conversion was in the best interests of creditors and the estate. The Court noted the provisions of the Confirmed Plan were binding on the Debtors under 11 U.S.C. § 1327(a), and two other divisions of this Court have recently addressed similar issues. Ultimately, the Court concluded the Debtors' failure to make over thirty post-petition payments directly to the secured creditor establishes a material default with respect to terms of the Confirmed Plan which harms both creditors and the estate. Although the Debtors made all required payments to the Trustee and the secured creditor failed to seek relief from stay to enforce it state law rights with respect to the residence, the Debtors failed to pay post-petition payments of $109,022.42 in violation of their Confirmed Plan and provided no evidence, or even allegations, as to where and how all of the income earmarked for these payments was used. The Debtors could not obtain a discharge of their debts in Chapter 13, and rewarding the Debtors with a discharge in Chapter 7 for their failure to comply with the Confirmed Plan and the Bankruptcy Code was inappropriate. In its discretion, the Court held the Debtors' material default warranted dismissal pursuant to § 1307(c)(6).