For servicers and lenders, one of the biggest challenges is the lack of uniformity in bankruptcy practices in each of the districts throughout the country. Even within some districts, individual judge's preferences often require unique formats for information provided. These requirements often delay processes and increase servicing costs.
The Advisory Committee on Bankruptcy Rules is expected to propose a uniform Chapter 13 plan and submit it for comment in August. The current version of the proposed plan raises concerns, as it consolidates many different motions into the plan confirmation process. Proposed changes to Federal Bankruptcy Rules 3012 and 3015 will force creditors to act more quickly in objecting to plans and analyzing their secured status.
Currently, case law provides that a secured lien passes through bankruptcy unaffected. Accordingly, a creditor may choose to file a proof of claim or simply wait out the case and exercise its rights against the property outside of the bankruptcy process. Additionally, current practice generally requires that a debtor file and serve a separate motion or adversary proceeding in order to strip a lien or otherwise impair the rights of a mortgage creditor.
The code revisions adopted in 2005 include a requirement that the court hold a confirmation hearing promptly after the case is filed. The initial confirmation hearing is held approximately 60 to 90 days after the petition date. However, the creditors are allowed approximately 120 days after the petition date to file proofs of claim. This timing creates a certain number of cases that are confirmed prior to the proof of claim bar date.
Following the history of allowing secured creditors to choose whether to participate in the bankruptcy process, many jurisdictions ‘pay per claim,’ which means that the trustee pays the amount in the timely filed proof of claim, regardless of the amount the debtor may have stated in the confirmed plan. Alternatively, some jurisdictions impose a duty on debtors to modify their plan if a timely filed proof of claim is received after the plan is confirmed (‘pay per plan’ jurisdictions).
The proposed rules would resolve this perceived conflict differently. Instead of holding the debtors responsible for obtaining the correct claim amount pre-confirmation or modifying their plans after confirmation, the duty is shifted to creditors to file proof of claim within 60 days of the petition date.
Thus, in an apparent effort to expedite plan confirmation, the proof of claim bar date would be decreased to 60 days from the petition, 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.
By reducing the time period for filing a proof of claim in half, the proposed rules increase the likelihood that creditors will miss the bar date or file incomplete proofs of claim. It appears that the intention of the drafters is to treat late proofs of claim as disallowed.
What is less clear is the effect of this disallowance on a later attempt to foreclose on the property after the debtor obtains a discharge. Many of the comments from the Chapter 13 Form Plan Working Group for the Advisory Committee on Bankruptcy Rules indicate that a lender or servicer that fails to timely file a proof of claim and participate in the confirmation process may waive both its claim in bankruptcy and its right to pursue the lien outside of bankruptcy.
The second most concerning proposal is to allow multiple types of relief to be obtained within the plan process. Under the proposed rules and plan, creditors will receive one notice of a proposed plan that will incorporate claim objections, cram downs and lien strips. Thus, a claim may be disallowed, a lien stripped or a cram down approved without the separate additional notice that is traditionally required.
Historically, a lien strip or cram down required an additional motion or, in some jurisdictions, an adversary complaint. The treatment of each claim will be included in one plan – not in several separate motions addressed to the adversely affected creditors. Accordingly, the proposed rules will mandate increased vigilance to ensure that both objection to plans and proofs of claim are timely filed in order to protect the creditors' rights from being impaired by a Chapter 13 plan.
The current proposals warrant attention and comment. It is incumbent upon all affected entities to provide comments that detail their objections to the proposals, so that the final rules and form plan may incorporate a balance between the rights of creditors and those of debtors. Stay tuned for updates as the process moves forward.
Deanna Lee Westfall and Britney Beall-Eder are attorneys with Denver-based Castle Law Group LLC. They can be reached at email@example.com and firstname.lastname@example.org, respectively.