At Last! New Bankruptcy Rule 3002.1 Facilitates CERTAINTY; Payment of Mortgage Arrearage Claims through the Chapter 13 Plan – The New Rule Helps Assure that the Mortgage Loan is CURRENT Upon Completion of the Plan
Chapter 13 bankruptcy is a very powerful and effective tool to stop a foreclosure. The essence of many chapter 13 plans, is funding all ongoing post-petition mortgage payments directly to the mortgage company (mortgagee), while funding all of the pre-petition arrearage through the chapter 13 plan.
Chapter 13 bankruptcy reorganization allows the borrower to “decelerate” defaults on their mortgages and reinstate the original payment schedule. The arrearage is cured over a course of up to five years, and the debtor is given a fresh start. With its recent amendments to the Bankruptcy Code, Congress has encouraged debtors with income to propose plans of reorganization to repay creditors over time instead of liquidating their assets, if any, without repayment plans.
Proper allocation of funds is important to the borrower AND the mortgagee.
On the one hand, the mortgagee must pay careful attention to a new provision in the Bankruptcy Code, found in 11 U.S.C. § 524(i). Section 524(i) is a consumer protection remedy added to the bankruptcy code by BAPCPA that provides for sanctions against a creditor for violation of the discharge injunction. Specifically, the section provides that the willful failure of a creditor to properly credit payments received under the terms of the confirmed plan shall constitute a violation of the discharge injunction if the failure causes material injury to the debtor.
On the other hand, the borrower NEEDS ASSURANCES that the mortgage loan is going to be completely current when the chapter 13 is over. When the case is over, the case closes, and the debtor receives his discharge. Here’s the problem: If the borrower receives his discharge, and is subsequently notified by the mortgagee that the loan is STILL in default, the borrower has an immediate crisis – he is no longer under the bankruptcy court’s protection and supervision.
Imagine the frustration of a borrower who successfully completes his chapter 13 plan, and is notified shortly after discharge that foreclosure proceedings are in the works, because additional sums are purportedly owed (whether accrued pre-petition, or post-petition)? These additional sums may be the result of an erroneous claim filed by the mortgagee, or more frequently, they’re the result of something that happened DURING the course of the plan that the borrower wasn’t even aware of – for example, an aupward adjustment of escrows for taxes and insurance, or for “property inspection” fees, attorneys fees, etc.
In that regard, it’s important to be proactive. Either the Debtor’s attorney, or the Chapter 13 Trustee SHOULD FILE SOMETHING to bring the issue to light at the end of the case, shortly before discharge, so the case is not discharged with mortgage arrearages or misc. fees still owed.
In the past, I have filed a Motion called: “Motion to Deem Mortgage Current,” requesting an Order from the bankruptcy Judge declaring the account current. If the mortgagee responds, suggesting the account is not current, then we still have jurisdiction in bankruptcy court, to address the problem.
However, amendments to the Bankruptcy Rules attempt to tackle this problem head-on:
The U.S. Supreme Court has adopted the amendments to the Federal Rules of Bankruptcy Procedure effective December 1, 2011, again changing procedure and policy for servicing loans in bankruptcy. The relevant changes are to Rule 3001 governing the filing of proofs of claim (POC), and new rule 3002.1, which covers notice issues relating to payment changes, post-petition fees, expenses and charges, and a new procedure implemented to determine loan status at discharge.
The amendments to Rule 3001 will add the following requirements to filing a proof of claim: (1) attaching an itemized statement of interest, fees, expenses, or charges included; (2) providing the amount to cure any default; (3) attaching an escrow account statement prepared as of the date the petition was filed attached to the POC. If a creditor fails to comply with the new requirements, the bankruptcy court may preclude the holder from presenting the omitted information as evidence in a future contested matter (such as an adversary proceeding or motion for relief from stay). The amendments also provide an official form for proofs of claim filed against the debtor’s principal residence.
Rule 3002.1 is new and supplements § 1322(b)(5) of the Bankruptcy Code relating to the curing of a default and maintaining payments on a home mortgage. This rule provides the following: (1) the holder of the claim shall file and serve on the debtor, debtor’s counsel, and the trustee notice of any change in the payment amount, including any resulting from an interest rate or escrow change, no later than 21 days before the new payment amount becomes due; (2) the holder of a claim shall file and serve on the debtor, debtor’s counsel, and the trustee a notice itemizing all fees, expenses or charges incurred in connection with the claim post-petition and asserted to be recoverable within 180 days after the fee, expense, or charge was incurred. An official form is provided to be filed as a supplement to the proof of claim; (3) the trustee shall, within 30 days of the final payment due under the plan, file and serve on the holder of the claim a notice stating the debtor has paid the full amount required to cure any default on the proof of claim. The holder of the claim has 21 days to respond to the trustee’s notice of final cure, and must file and serve on the debtor, debtor’s counsel, and the trustee an itemized statement indicating whether it agrees the claim has been paid in full and whether the debtor is otherwise current on all payments now due. On motion of the debtor or the trustee, a hearing will be held to determine whether the debtor has cured the default and paid all required post-petition amounts due.
In accordance with Rule 3002.1, it appears that our local chapter 13 trustee – Mary Ida Townson – is now filing a Notice of Final Cure Payment. The Notice states, in part, as follows:
Within 21 days of the service of the Notice of Final Cure Payment, the creditor MUST file and serve a statement as a supplement to the holder’s proof of claim on the Debtor, Debtor’s Counsel and the Chapter 13 Trustee, pursuant to Fed.R.Bank.P.3002.1(g), indicating 1) whether it agrees that the Debtor has paid in full the amount required to cure the default on the claim; and 2) whether the Debtor is otherwise current on all payments consistent with 11 U.S.C. § 1322(b)(5).
The statement shall itemize the required cure or post-petition amounts, if any, that the holder contends remain unpaid as of the date of the statement. The statement shall be filed as a supplement to the holder’s proof of claim and is not subject to Rule 3001(f). Failure to notify may result in sanctions.
Suffice it to say, that Rule 3002.1, is a brilliant addition to the Code. Although it adds an administrative burden upon the Trustee and the Mortgagee, the end result – assuring that the Debtor is getting a fresh financial start – justifies the means.
Having problems with your mortgage, or other debts? Give us a call for a free consultation.
Brian R. Cahn | www.northgabankruptcy.com