Delay in Applying Mortgage Payments Did Not Result in Violation to Discharge Injunction

Delay in Applying Mortgage Payments Did Not Result in Violation to Discharge Injunction

A creditor’s willful misapplication of any payments contrary to a confirmed plan can lead to a violation of the discharge injunction if it causes a material injury to the debtor.

A common situation which leads to a finding of a violation of the discharge injunction is when a creditor demands post-petition payments already paid under a chapter 13 plan as a result of the creditor’s misapplication of: (a) ongoing monthly payments to the prepetition arrearage claim, (b) prepetition arrearage payments to ongoing monthly payments, or (c) ongoing monthly payments to the wrong month.

What happens, then, when a creditor delays the proper crediting of a payment, and such delay leads the creditor to incorrectly inform the debtor that she can make a lower monthly payment than what was actually required?

The U.S. Bankruptcy Court for the District of Kansas recently addressed a similar situation. The debtor made her full monthly payments, including those owed under her mortgage as well as under the confirmed chapter 13 plan, through February 2019.

In March 2019, debtor's monthly payment was $713.25, comprised of a $414.75 note payment and $299.08 escrow deposit. On March 20, 2019, the creditor incorrectly informed that she had a balance of $299.08 in suspense which could be applied to the $713.25 March payment.

As a result, the debtor paid only $414.17. In reality, the alleged balance that was in suspense was actually a prior escrow payment that, due to internal accounting errors, had not yet been credited to a prior period.

Eventually the creditor informed the debtor of the mistake and required that she pay the $299.08 that had not been paid for the March 2019 period, which she did on June 17, 2020. No charges, late fees, service fees, or additional interest charges were imposed by the creditor as a result of the delay.

The debtor eventually initiated an adversary proceeding against the creditor based on a violation to the discharge injunction. The debtor alleged that she relied on the creditor's “promise” that $299.08 in suspension would be applied to satisfy the remainder of her March 2019 payment, which turned out not to be the case. She further claimed that such mistake by the creditor caused her emotional distress, required to bring the action, and made her ineligible to have her private mortgage insurance removed from her account.

The court concluded that the debtor could not prove the necessary elements of a violation to the discharge injunction because the creditor never misapplied a payment. Instead, the creditor merely delayed the correct application of a payment. Citing the Norton treatise, the court noted that “creditors should not be in violation of the injunction for internal accounting inconsistencies as along as steps are not taken to commence an action to collect any deficiencies caused by the internal accounting.” The court also noted that, even if the delay could be deemed a misapplication of a payment, the debtor’s action would still fail because the creditor’s actions were not willful.

It emphasized that the presumption that a creditor intended its acts was not present because the delay was the result of actions in conflict with the creditor's usual procedures. Moreover, it pointed to the fact that no unauthorized charges were made, nor any collection actions filed against the debtor as further support of the absence of any willful act.