February 6, 2013
by Deanna Westfall
The Castle Law Group, LLC
USFN Member (Colorado, Wyoming)
Chair, USFN Bankruptcy Committee
by David McAllister
Pite Duncan, LLP
USFN Member (California)
Vice Chair, USFN Bankruptcy Committee
Recently, the Chapter 13 Form Plan Working Group for the Advisory Committee on Bankruptcy Rules released its current proposals for comment. These proposals are broad, encompassing both a proposed National Chapter 13 Plan form and significant rule changes. As explained more fully below, the proposed rules and National Chapter 13 Plan are heavily weighted against mortgage lenders’ and servicers’ interests. Uniformity, which is one of the stated goals of the Working Group, is generally beneficial to our industry. However, these proposals, if approved, will likely add significant risks and costs to loan mortgage servicing that far outweigh any benefit obtained by uniformity.
Starting with the proposed rules, the most disturbing new provision would require secured creditors to file a proof of claim in Chapter 13 plans to get paid. In other words, if the debtor’s proposed plan correctly states the amount of arrearage to be cured, the servicer is still required to file a proof of claim in order to receive distributions. Directly in contrast with this requirement is a provision stating that the terms of the confirmed plan will trump any contrary proof of claim. Since the plan would control regardless of the arrearage amount stated in the timely-filed proof of claim, there will likely be an increase in plan objections by creditors seeking to protect their rights.
The proposed rules indicate that the deadline to object to the plan will be at least seven days prior to the confirmation hearing, unless ordered by the court. Likewise, the proof of claim bar date would be decreased to 60 days from the petition filing, rather than 90 days from the first scheduled Section 341 meeting of creditors. This shortens the bar date by more than 90 days and will create further pressure on lenders/servicers to timely file proofs of claim that comply with all of the various requirements of the rules. When combined with the changes to the proof of claim process that became effective in 2011 (e.g., escrow analysis, itemization for attachment A to B-10 form, etc.), these proposed rules would greatly increase the burdens of servicing mortgages in Chapter 13 proceedings.
The proposed rules and the uniform Chapter 13 plan further provide that claim objections, cram downs, and lien strips that currently require a separate objection, motion, or adversary complaint, may be completed in the plan confirmation process. Thus, a claim may be disallowed, a lien stripped, or a cram down approved without the separate additional notice historically required via a claim objection, motion, or adversary proceeding. The proposed rules will also allow a debtor to file a motion to obtain an order confirming a secured claim has been satisfied after payment or discharge of the claim. Accordingly, the proposed rules will mandate increased lender/servicer vigilance to ensure that plan objections, as well as proofs of claim, are timely filed in order to protect the creditor’s rights from being impaired/modified under a Chapter 13 plan.
Finally, the new proposal leaves unresolved the question of what happens to a late-filed proof of claim or to a claim that is not filed at all. Precedent tells us that a secured creditor is not required to file a proof of claim and may simply “ride out” the Chapter 13 process relying on its lien for future satisfaction. See, 11 U.S.C. Section 506(d); Long v. Bullard, 117 U.S. 617, 6 S. Ct. 917 (1886); In re Taylor, 132 F.3d 256 (5th Cir. 1998); and In re Tarnow, 749 F.2d 464 (7th Cir. 1984). Furthermore, Section 1325(a) clearly states that a debtor’s personal liability for long-term debts secured solely by a debtor’s principal residence that mature after plan completion is not discharged. Whether the new rule proposals will effect a waiver of arrears for those creditors who do not timely file proofs of claim and object to the plan (in the absence of any corresponding change to the Bankruptcy Code) remains to be seen.
The final proposals are likely to be released in August 2013 for official comment by the Rules Committee, but the Working Group is soliciting comments now. While it may be tempting to discount the proposals as improper attempts to legislate through the rules/forms process, and that position may be legally correct, it is risky to rely on that argument. It is evident from the draft rules and the proposed National Chapter 13 Plan that lenders/servicers’ views have not yet been appropriately considered and, therefore, the Working Group needs to receive feedback from mortgage lenders/servicers and their legal counsel. Further, it would be appreciated if industry participants would share with USFN their comments and feedback to the Working Group by forwarding a copy to email@example.com.
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Winter 2013 USFN Report