Chapter 13 Plan May Not Manufacture Homestead Mortgage Default In Order to Pay Debtor’s Attorney Fees

The recent case of In re Maike, a decision from the Eastern District of Michigan District Court on appeal from the bankruptcy court, throws light on the tensions between 11 USC 1322, which prohibits modification of the rights of a creditor secured only by a lien on the debtor’s principal residence, and the administrative priority of debtor’s counsel’s attorney fees.  In Maike, the debtor defaulted on his mortgage and filed a Chapter 13 case to cure the default.  At the time of confirmation, the trustee did not have on hand sufficient funds to pay the debtor’s attorney fees.  The mortgage company objected to confirmation on the basis that there were not sufficient funds to pay post-petition mortgage monthly payments.  The bankruptcy court adjourned the confirmation hearing for three months, at which time there were sufficient funds to pay the attorney fees, but not enough to make a mortgage payment.  The court confirmed the plan over the objections of the creditor.

On appeal, the district court reversed and remanded.  Although 11 USC 1325 allows a debtor to cure debtor-created defaults under a mortgage, this section does not allow a debtor’s plan to create a default for the sole purpose of paying the attorney fees first.  The court reversed and remanded the matter to the bankruptcy court.

Presumably, on remand, the debtor will have to modify his plan to provide for payment of attorney fees in installments so that there will be sufficient funds to make monthly mortgage payments post-petition.

UPDATE:  On second appeal, the District Court upheld a decision of the bankruptcy court to require debtor’s attorney to refund a portion of the attorney fee paid as a result of the initial confirmation (prior to the first appeal) so that the mortgagee could receive full payment of the two post-petition, pre-confirmation payments it was due.

© Steve Sowell 2017