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With the Judicial Conference Advisory Committee on Bankruptcy Rules having proposed amendments to the Federal Rules of Bankruptcy Procedure and Official Forms, industry professionals - especially mortgage servicers - are paying close attention. As these proposals made their way through the committee and review process, the commentary and debate were contentious, and the results have significant implications for creditors and their counsel across the country.

Understanding why the new bankruptcy rules were proposed, how they would function, when they would go into effect, what kinds of challenges and benefits may be associated with their passage and implementation, and what kind of ramifications they would have on the industry is essential for individuals and institutions that may potentially be impacted by these changes.

 

The proposals

There are two major proposals that have been considered and submitted by the rules committee. Although both impact bankruptcy creditors in significant ways, these two separate actions are not tied together per se.

The first proposal is to amend the current bankruptcy rules with a series of changes that would include a national model Chapter 13 plan. The idea behind this proposal is that with 93 districts around the country and numerous practitioners in each district, creditors must review countless variations of Chapter 13 plans to discern treatment of a claim. There is little to no uniformity, and from a servicing perspective, reviewing the vast number of different Chapter 13 plans (with different structure, order of information and details) is a daunting and inefficient task. The stated purpose of the national form plan would be to “... eliminate the current anomaly of a major aspect of consumer bankruptcy practice not having a national form for presenting essential information to parties in interest.”

The national form proposal generated a wide range of feedback. Traditionally, Chapter 13 plans have been locally drafted and some districts see no reason to change. Additionally, some judges, trustees and practitioners feel there is no need to adopt a new standard and that these changes would restrict local autonomy. Conversely, others have reacted more positively - citing the need for clarity and consistency across all districts. Those proponents state that bankruptcy operates under federal law and inconsistencies in application should be reduced, if possible.

A number of proposed rule changes were also submitted along with the proposed uniform plan. One of the most significant changes proposed shortening the proof of claim deadline to 60 days after the petition date - down from roughly 120 days under the current rules. A proof of claim would need to be filed within 60 days of the petition date, with an additional 60 days allowed for filing the required loan documentation. This bifurcated process presents possible ethical issues for creditors, which would have to sign the claim without reviewing supporting documentation. All parties would incur increased administrative and legal costs associated with the need to review the claim twice where trailing documentation must be filed. Although there are additional rule changes proposed to support the implementation of a national model plan, the two largest controversies are the single national plan and the shortened claims bar date.

The second major proposal impacting creditors is the result of a forms modernization project undertaken by the same rules committee. If passed, creditors will see a new proof of claim form and mortgage attachment form this December. Although the proof of claim form, renumbered to Form 410, remains materially the same with only small changes, the new 410A attachment is a significant change from the current attachment. Form 410A is, in essence, a payment history back to the first date of the current default.

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Rules committee review

With such potentially significant changes on the table, mortgage creditors and their counsel kept a close watch as the rules committee met this past April to consider both proposals. With regard to the national model plan, the committee reviewed several options: pushing forward with a call for a national plan (and the accompanying rules amendment), scrapping the proposal as unworkable or adopting an 11th hour compromise proposal.

Under the proposed compromise, there would not be a single national model plan, but each jurisdiction would have the opportunity to either accept a national form or opt out and establish its own district model plan. This would reduce the number of different plans from hundreds to no more than 93.

After a lengthy discussion of the options, the committee agreed to pursue a compromise solution: report this decision to the standing committee, with its recommendations for needed refinements, rewrites and clarifications prior to implementation. We hope to see a final version back in front of the standing committee in early 2016. Provided that an agreed-upon proposal does not need to be republished and moves forward without any unanticipated hurdles, the rule changes and model plan option could formally go into effect as early as December 2016. Alternatively, if the committee decides that any agreed-upon compromise proposal does need to be republished for additional vetting, it most likely would not go into effect until at least December 2017.

As to the amended proof of claim form and loan history attachment, that proposal did pass and was reported to the standing committee, as well. The new claim form and attachment are expected to go into effect this December with only very minor changes.

 

Planning for change

Servicers will need to be proactive and move quickly to prepare for this most immediate change. Servicers should review the content of the claim form and the attachment, and they will likely want to work closely with their technology provider to determine if the form can be automated. Processes will need to be put in place internally to gather the necessary information to populate the form and to verify or validate that information. Servicers and attorneys may have to enhance staffing, both in number of personnel and the level of experience and expertise.

It is interesting to note that a similar version of this form is already in effect in Texas, where many law firms and servicers have special staffers in place with specific experience in escrow and basic accounting practices. Experience in reading through loan histories and identifying and reviewing appropriate fees and costs for routine loan servicing, as well as default servicing, will also be critical.

It will be a challenge for servicers to make the necessary organizational adjustments in such a relatively short time frame. Although creditors were aware of the potential change, with no confirmed forms in place, planning and development were hampered. With so many moving parts and relatively little time to adapt, this should be top of mind for every bankruptcy department in the country - large or small.

 

Marcy Ford is managing partner and executive vice president of Michigan-based Trott Law PC, while Dan West is shareholder and managing attorney of bankruptcy for SouthLaw’s St. Louis operations. Ford can be reached at mford@trottlaw.com, and West can be contacted at dan.west@southlaw.com. Trott Law and SouthLaw are both USFN member firms.

Bankruptcy

New Proposed Bankruptcy Rules And Forms Move Forward

By Marcy Ford & Dan West

These proposals have serious implications for creditors and their counsel across the country.

 

 

 

 

 

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