September 13, 2016
by John B. Kelchner and John S. Kay
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)
South Carolina has been one of the few states still requiring bankruptcy debtors to make post-petition mortgage payments directly to the mortgage lender or servicer. This will change on October 1, 2016 pursuant to operating orders issued by the three U.S. Bankruptcy Judges in South Carolina. The requirements for mortgage conduit payments for Judge Burris are contained in Operating Order 16-03, and the requirements for Judge Waites and Judge Duncan are contained in Operating Order 16-02.
Operating Order 16-03 (Judge Burris) — While the requirements are listed in two separate operating orders, the essential difference between the two orders is that under Judge Burris the conduit mortgage payments are not mandatory. [Footnote 3 of Operating Order 16-03 states, “This Operating Order is substantially consistent with Operating Order 16-02 Conduit Mortgage Payments in Cases Assigned to Judge Waites and Judge Duncan except paragraph I was altered to allow rather than require Conduit Mortgage Payments and paragraph II was omitted.”]
Operating Order 16-02 (Judge Waites and Judge Duncan) — This order requires the use of conduit mortgage payments under the following conditions: (a) When, as of the petition date, the debtor is delinquent six months or more in payments owed to a mortgage creditor, or (b) As part of a Section 362 Settlement Order involving a mortgage payment delinquency that proposes a cure of a post-petition default in mortgage payments that were delinquent for four months, or more, on the day the motion for stay relief was filed; or (c) If requested by the debtor and without objection from, or with the agreement of, the mortgage creditor and trustee; or (d) As otherwise ordered by the court.
Both Operating Orders — Pursuant to each operating order, there are several other important issues raised by the new procedure:
• If the mortgage creditor has not filed a “Compliant” proof of claim in the case, the Chapter 13 trustee may file a Request for a Mortgage Creditor Report and a request for a formal hearing on the matter. The information sought will be the amount of pre-petition arrearage, escrow status, and ongoing payment amount. If this is not provided (to the trustee’s satisfaction) by the creditor prior to the hearing, counsel for the creditor and a representative of the creditor must appear at the trustee’s hearing. [Footnote 9 of Operating Order 16-03 states, “‘Compliant POC’ is defined as a Proof of Claim filed in full compliance with the Official Forms and Bankruptcy Rules 3002 or 3004, and including: (a) all relevant Loan Documents; and (b) a detailed breakdown of any escrow, mortgage insurance, or other monthly obligation as provided for in the terms of the Loan Documents.”]
• If the trustee has commenced disbursements to the creditor prior to the filing of a proof of claim, the payment amount disbursed by the trustee will be deemed the correct amount.
• No Payment Change Notice filed by the creditor will be effective until the creditor has filed a proof of claim.
Conclusion — The new conduit payment procedure places even more emphasis on making absolutely sure that the creditor files an accurate proof of claim as quickly as possible to avoid payments by the trustee that are at an amount less than what is called for by the loan terms, or having to have a representative appear at a hearing on the matter.
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