Lenders and Other Secured Creditors! New Bankruptcy Proof of Claim Rules Took Effect 12/1/11
Author(s): Chad S. Caby
On December 1, 2011, new and amended federal bankruptcy rules and procedures for filing proofs of claim in bankruptcy cases took effect. Although the changes largely impact the filing of proofs of claim in Chapter 13 bankruptcy cases, they also impact secured creditors in individual Chapter 7, 11 and 12 bankruptcy cases where a creditor holds a claim secured by a security interest in the debtor's principal residence.
The purpose of the new rules and procedures is to provide individual debtors with more accurate and complete disclosures relating to how secured creditors are processing and handling debtor loans during bankruptcy. The amount of information that must now be provided when filing proofs of claim has increased significantly. This means that secured creditors will be required to perform additional work and incur additional expenses to comply with the new rules and procedures.
Because the new rules, amendments, and forms regarding the filing of proofs of claim only recently took effect, it is unknown how bankruptcy courts will interpret the various provisions of those rules, including provisions for the imposition of sanctions or for allowing attorneys' fees and costs against a secured creditor who does not follow the new rules. Although the interpretation of the new rules and forms and the development of case law will take time to develop, secured creditors will want to implement new internal procedures to ensure they comply with the new and amended requirements.
THREE NEW FORMS
The new rules, amendments, and forms for filing proofs of claim were approved by the Judicial Conference in September of 2010 and subsequently approved by the United States Supreme Court on April 26, 2011. Each of the new or amended rules is implemented by three new forms that must be filed as attachments or as supplements to a creditor's original proof of claim.
Mortgage Proof of Claim Attachment Form
Amended Bankruptcy Rule 3001 sets forth new procedures for certain proofs of claim filed with any bankruptcy court. New subdivision (c)(2) provides that additional supporting information (Mortgage Proof of Claim Attachment, B10 Attachment A) ("Attachment A") must be filed with a proof of claim where (i) the debtor is an individual; and (ii) the claim being filed is secured by a security interest in the debtor's principal residence. This could apply in the context of an individual Chapter 7, 11, or 13 bankruptcy case. If proper procedures are not followed, Amended Bankruptcy Rule 3001 authorizes the Court to impose sanctions on creditors who fail to provide the required information.
Amended Bankruptcy Rule 3001 and Attachment A require three areas of additional information that must be included when the original proof of claim relates to a debtor's principal residence:
Part 1: Statement of Principal and Interest Due as of the Petition Date
Principal and interest that is due on the claim must be itemized.
Total interest due as of the petition date must be broken down by interest rate and corresponding time periods.
Total combined principal and interest due must be disclosed.
Part 2: Statement of Prepetition Fees, Expenses, and Charges
Secured creditors must provide a detailed description of the fees, expenses, and charges incurred in connection with the claim as of the petition date, the dates the charges were incurred, and the amounts of the charges.
Part 3: Statement of Amount Necessary to Cure Default as of the Petition Date
If there is an escrow payment included in the installment payment, the secured creditor must attach an escrow statement prepared as of the petition date that is consistent with applicable nonbankruptcy law.
– Provide date last payment was received by the secured creditor.
– Provide number of installment payments due as of the petition date.
Amount of Installment Payments Due:
– Provide breakdown of the number of installments and the corresponding payment amounts.
– Provide the total amount of installment payments due as of the petition date.
– Add total prepetition fees, expenses, and charges.
– Subtract total unapplied funds.
– Provide total amount necessary to cure default as of the petition date.
Attachment A must be filed with every proof of claim in which the debtor is an individual and the secured creditor asserts a security interest in the debtor's principal residence. Unfortunately, this added step will require additional effort and time. The good news, however, is that Attachment A clearly and succinctly states the required procedures necessary to comply with Amended Rule 3001.
A word of caution: If the holder of a claim fails to provide the information required by Amended Rule 3001, the court, after notice and hearing, may take either or both of the following actions to remedy the failure:
(1) Preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or
(2) Award other appropriate relief, including reasonable attorneys' fees, caused by the failure.
The language set forth above likely means a bankruptcy court could preclude a secured creditor from submitting evidence in the context of a bankruptcy case or adversary proceeding that would indicate the prepetition and postpetition amounts owed to the secured creditor for purposes of plan confirmation. Alternatively, the bankruptcy court could award the debtor his/her attorneys' fees for having to file pleadings to compel this information. Also, the bankruptcy court can "award other appropriate relief," which is left to the bankruptcy judge's discretion and would depend on the individual case and the culpability of the secured creditor in not providing the required information.
Notice of Mortgage Payment Change
Bankruptcy Rule 3002.1(b) is a new rule relating to the filing of proofs of claim in Chapter 13 cases where there is a change in the amount of the installment payment during the term of the Chapter 13 plan. The rule applies in the following circumstances:
(i) Only in Chapter 13 cases;
(ii) Where the secured creditor has filed a proof of claim secured by a security interest in a debtor's principal residence; and
(iii) Where the secured creditor's claim is provided for under the terms of the debtor's Chapter 13 plan of reorganization pursuant to 11 U.S.C. § 1322(b)(5) (the Bankruptcy Code section allowing debtors to cure prepetition arrears).
If the above circumstances apply and if an installment payment changes, the secured creditor must file a new form, Notice of Mortgage Payment Change (B10 Supplement 1) ("Supplement 1"), to provide the debtor, debtor's counsel, and the trustee notice of the change in the installment payment amount. The form must be filed as a supplement to the secured creditor's original proof of claim at least 21 days prior to the date the new payment is due. Following are examples of instances in which the secured creditor would need to file Supplement 1 to its original proof of claim:
The debtor is curing the secured creditor's secured claim under a Chapter 13 plan of reorganization.
There are any changes in postpetition mortgage payment amounts, including those payment changes arising from escrow adjustments or interest rate changes.
There are any changes in payment amounts to a home equity line of credit or standard mortgage.
Supplement 1 must be served on the debtor, debtor's counsel, and the trustee, and filed as a supplement to the secured creditor's original proof of claim at least 21 days prior to the new payment effective date.
One purpose of the new Rule is to provide debtors with advance notice of any payment changes so the debtor's bankruptcy case is not subsequently dismissed because of the debtor's failure to account for and pay the new amounts owed to its secured creditor(s).
Notice of Postpetition Mortgage Fees, Expenses, and Charges
New Bankruptcy Rule 3002.1(c)-(i) implements a significant change in procedure for providing notice of any postpetition fees, expenses, and charges that the secured creditor asserts were incurred after the petition was filed and which are recoverable against the debtor or against the debtor's principal residence. The purpose of the new Rule 3002-1 is to remedy the perceived unfairness that debtors were exiting their bankruptcy cases with debts that were incurred by secured creditors and passed on to them during the term of their Chapter 13 plan, but were not ever disclosed to the debtor.
Again, there is a new form, Notice of Postpetition Mortgage Fees, Expenses, and Charges (B 10 Supplement 2) ("Supplement 2"), that must be filed as a supplement to any proof of claim filed by the secured creditor in Chapter 13 cases where the claim is secured by a security interest in the debtor's principal residence, and the claim is provided for under the debtor's Chapter 13 plan of reorganization. The following rules apply:
Only in Chapter 13 cases.
If the secured creditor is a holder of a claim secured by the debtor's principal residence and has incurred postpetition fees, expenses, or charges in connection with the debtor's bankruptcy case that the secured creditor believes are recoverable against the debtor or the debtor's principal residence, the creditor must file Supplement 2.
Supplement 2 must include an itemization of all fees, expenses, or charges assessed against the debtor within the previous 180-day period.
Supplement 2 must be filed as a supplement to the original or amended proof of claim.
Supplement 2 must be served on the debtor, debtor's counsel, and the trustee.
Supplement 2 is a significant departure from previous bankruptcy practice. The new rule essentially provides that the secured creditor will need to review its Chapter 13 cases twice a year to determine whether the secured creditor has incurred fees, expenses, or charges relating to a debtor's bankruptcy case. If so, the secured creditor will be required to itemize those fees and supplement its original proof of claim.
Also, similar to Amended Bankruptcy Rule 3001, if the holder of a claim fails to provide any of the information required under Amended Bankruptcy Rule 3002, the court, after notice and hearing, may impose sanctions against the secured creditor for its failure to comply.
Chad S. Caby is an associate with Rothgerber Johnson & Lyons LLP in the Denver office. Mr. Caby's practice includes representation of debtors, creditors, and trustees in bankruptcy and insolvency proceedings, as well as workouts and restructuring entities outside of court. Mr. Caby can be reached at 303-628-9583 or at email@example.com