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Bankruptcy Court Adopts Conduit Mortgage Plan

Future mortgage payments to come through the chapter 13 trustee.

By Columbia – Lexington Bankruptcy Attorney Lex Rogerson

Many people who file bankruptcy under chapter 13 will now make their future mortgage payments through their trustee, and not directly to the mortgage company, under rules recently adopted in South Carolina.

mortgage-statement-optimizedHow conduit plans work

Most people who file chapter 13 choose that approach because they are behind on their mortgages.  Chapter 13 allows debtors to bring their mortgages current over three to five years by paying the arrearage through a bankruptcy plan.  Meanwhile, they must maintain the post-petition payments — those coming due while their case is pending — as the mortgage requires.

For over 30 years, South Carolina debtors have made these continuing payments directly to the mortgage creditor.  In effect, they pay their mortgages on two separate tracks: the past due payments through their trustee, and the future payments to the mortgage company.

For many debtors in the Columbia area, that changed on October 1 of this year.  Under the new rules, debtors who are six months or more behind on their mortgages must now make the future payments through their chapter 13 trustee.  Because the trustee serves as the pipeline for future payments, we call this a conduit plan.

Why the new approach?

Several developments spurred the bankruptcy judges to adopt this rule.  First, many debtors fail to rehabilitate their mortgages because they fall behind on the continuing payments.  This leads mortgage creditors to file stay relief motions seeking permission to foreclose.  Making things worse, debtors often disagree about which payments have or have not been made but lack adequate proof of their payments.

Second, mortgage servicers have become slower in filing for stay relief.  By the time a delinquency comes to light, debtors have fallen so far behind they cannot catch up.

Third, a few courts around the country have held that a debtor who has not kept up the continuing mortgage payments is not entitled to a discharge.   Even though he has made all the trustee payments, all the debtor’s debts survive, not just the mortgage debt.

Conduit plans can help solve most of these problems.  Paying through the trustee means that missed payments are quickly detected.  Trustees maintain accurate records of what has been paid and when.  And with conduit plans, a debtor who has made all plan payments is almost always current with the post-petition payments.

Increased costs

One disadvantage of conduit plans is that they tend to increase the debtor’s overall payments a bit, at least at the beginning.  As part of their plan payments, debtors must pay commissions based on the total funds the trustee receives.  Adding the continuing mortgage payments means more money flowing through the trustee’s hands and increased costs in the plan.  On the other hand, the law limits each trustee’s total compensation.  So an overall increase in the funds trustees handle will eventually result in a lower percentage on each dollar.  The advocates of conduit plans assert that it largely evens out in the long run.

South Carolina’s bankruptcy judges still need to work out several important details about conduit plans will work here.  But nationally, courts are increasingly going to conduit plans, with well over half of the bankruptcy courts requiring them under some circumstances.  Hopefully the experience in other districts will help us work out these unresolved issues.


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