One Payment to Rule Them All: Conduit Mortgage Plans

Photo: Thanks to Aron Visuals


Can we can all agree that Sauron, a character in J. R. R. Tolkien’s Lord of the Rings fantasy books, was not a very nice guy?  It’s fortunate he wasn’t better organized.  Sauron's plan for Middle-Earth conquest involved passing out 19 different rings of power to various elves, dwarves and humans.  Sauron then held back the “One Ring” that he intended to use in order to control the other 19 and … lost it.  There are many take-aways here.  “Simple” does not always equate to “well-organized.”  If Sauron lived in modern times, I am sure he would’ve used the same password for all his email and online accounts.  Organization is an important part of success, whether you are trying to conquer mythical worlds, or just trying to complete a Chapter 13 bankruptcy plan. 

As discussed in a recent post, it is important to know which creditors are covered by Chapter 13 plan payments, and which ones must continue to be paid separately.  If you are a homeowner in a Chapter 13 case, it’s critical to know whether: (1) you are supposed to continue to make ongoing payments to your mortgage lender each month, or (2) whether your Chapter 13 plan payment includes that amount.  The mortgage payments under the first option are “direct payments,” and the second option is called a “conduit mortgage plan.” 

In a conduit mortgage plan, the Chapter 13 Trustee is the “conduit” who receives payments from the Chapter 13 debtor and pays creditors according to the plan, including the mortgage payments.  Why is this a big deal?  And is it a good idea?

Advantages

Some homeowners are forced to file a Chapter 13 bankruptcy case to resolve disputes over the amounts they owe their mortgage lender or servicer.  A Chapter 13 case is an opportunity to resolve disputes over the amounts owed by scrutinizing the claim filed by the mortgage creditor, and to cure the true amounts owed over time through Chapter 13 plan payments.  But what happens if the mortgage creditor continues its erroneous accounting for payments made after the bankruptcy filing?  In that situation, efforts to clear up the missed pre-bankruptcy payments may be rendered meaningless.  When you make ongoing payments directly, it will be a matter of your recordkeeping versus the mortgage creditor’s records, if there is a dispute.

In a conduit mortgage plan, the Chapter 13 Trustee makes the ongoing payments on the homeowner’s behalf (from payments the Trustee receives from the homeowner).  Chapter 13 Trustees are renowned for their excellent recordkeeping.  If a payment dispute arises in a conduit mortgage case, the Chapter 13 Trustee can provide information to the mortgage creditor, and the Court if necessary, on the payments made and how they should have been applied.  This can be a tremendous advantage for a homeowner who is dealing with an unorganized mortgage creditor. 
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​Conduit mortgage cases take full advantage of the notice provisions added by Bankruptcy Rule 3002.1.  That rule requires mortgage creditors to provide notice of payment changes, and any new fees, expenses or charges the mortgage creditor asserts.  Chapter 13 Trustees review and challenge unnecessary payment increases or charges asserted by the mortgage creditor.  At the end of the Chapter 13 case, the Trustee files a “Notice of Final Cure Payment.”  This notice requires the mortgage creditor to respond and to state whether or not it disputes that all payments have been made, and all delinquencies cured.  If the mortgage creditor disagrees, the dispute will be resolved in Bankruptcy Court; if the creditor does not dispute the Trustee’s notice, the homeowner receives a Court document stating the mortgage loan is completely current.   

Of course, not all homeowners are forced into Chapter 13 because of a mortgage creditor’s faulty record-keeping.  Many homeowners fall behind in mortgage payments due to one or more unfortunate events, such as illness, unemployment, or divorce.  In addition, some homeowners have less than stellar organization skills.  Making a single conduit payment to a Chapter 13 Trustee can help keep a homeowner on track.  This goes doubly where a homeowner has failed to make ongoing mortgage payments in one or more prior Chapter 13 cases.  Filing a conduit mortgage plan shows the mortgage creditor and the Court that the homeowner is making a good-faith attempt to make consistent payments to the creditor, monitored by the Trustee. 

DISADVANTAGES
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Not all homeowners will benefit from conduit mortgage plans.  If you have always been current in your mortgage payments and have never had a dispute with your mortgage company, there is probably no reason to involve a Trustee. 

Cost is a consideration.  Chapter 13 Trustees take a fee from the payments received, which can be less than 4% or as high as 10%.  So, if your usual mortgage payment is $1,000 per month, you will need to pay up to an additional $100 each month for the Trustee fee in a conduit mortgage case.  This additional cost may be well worth it when there is a long history of late fees and avalanche of related charges, and if saving your home is your primary goal.  If you are filing Chapter 13 for other reasons, the fees associated with a conduit mortgage plan might not make sense. 

Practicality is a less valid, but all too real, disadvantage.  Consider two Chapter 13 Debtors, Sam and Frodo.  Both have mortgage payments of $1,000, and must pay $500 to the Chapter 13 Trustee to cover other debts in their cases.    
  • Sam makes his mortgage payments directly.  Thus, every month Sam sends $1,000 to his mortgage company on the first of the month.  On the 15th of each month Sam sends another $500 to the Chapter 13 Trustee.
  • Frodo has a conduit mortgage plan.  Each month he makes a single payment of $1,600 to the Chapter 13 Trustee (covering the mortgage payment and related Trustee fee, plus other claims handled in the Chapter 13 plan).

 A $1,600 monthly payment can cause “sticker shock.”  Not only is it $100 more than the payments Sam makes, but the amount and timing of that single payment can be more burdensome than making two payments of $1,000 and $500.  

Consider what happens if Sam and Frodo have a temporary reduction in income (possibly time lost from work due to an unexpected journey):  
  • Sam can more easily prioritize.  If making house payments are paramount, Sam can make sure this amount is always paid first.  Ultimately, Sam’s Chapter 13 case may fail, but his house may not be at risk.  Yet, the Trustee and mortgage creditor may take a dim view of Sam’s plan if he did it this way precisely because he fears he may not be able to make both payments each month.  Even though Sam is paying the mortgage directly, the automatic stay in the bankruptcy case protects him from his creditors.  The Trustee may object to Sam’s plan because it is not feasible, or even claim that the plan is proposed in bad faith.
  • On the other hand, if Frodo cannot make the full $1,600 payment to the Trustee, his Chapter 13 case will be in peril.  His house payments are necessarily tied up in the bankruptcy case.  If Frodo remains delinquent in his bankruptcy payments, the Chapter 13 Trustee will seek dismissal.  If the case is dismissed Frodo may find himself worse-off at that point than before he filed the case – a situation not that different from Sauron after losing the One Ring.  
In about half of the jurisdictions in the United States, conduit mortgage plans are required if you are delinquent in making your mortgage payments.  In other jurisdictions, filing a conduit plan is optional.  If you are considering a Chapter 13 case because you are trying to save your home, be sure to ask your attorney about the requirements, advantages and disadvantages of a conduit mortgage plan in your case. 

The 7thirteen is a blog written by Jeff Narmore, focusing on consumer bankruptcy issues.  Visit my website at narmorelawoffice.com.

Narmore Law Office LLC is a debt relief agency and helps people file for relief under the Bankruptcy Code.

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