New Chapter 13 Plan Forms and Bankruptcy Rules Take Effect December 1, 2017

Barring an unexpected intervention from Congress, on December 1, 2017, there will be new Chapter 13 bankruptcy plan forms, as well as related new federal bankruptcy rules. In this article, we discuss the new plan forms and the new rules of note to lenders. We also discuss a recent court opinion that impacts lenders.

I. New Chapter 13 Plans

By way of brief history, the new Chapter 13 Plan forms are the result of a six-year project to create a national form Chapter 13 plan (to date, each jurisdiction has had its own form). The effort started after the Supreme Court ruled in 2010 that a creditor is bound by the terms of a confirmed plan even when those terms are contrary to the creditor's legal rights, so long as the creditor received fair notice and an opportunity to object to the plan.¹ The ruling presented the risk of debtors slipping improper provisions into proposed Chapter 13 plans, and overburdened courts, Chapter 13 trustees, and creditors not finding those provisions until after the plan is confirmed. A primary goal of a national plan was to lessen that risk through (a) uniformity (a creditor who deals with debtors in a variety of jurisdictions would no longer need to review different plan forms), and (b) clear disclosures, such as by requiring that "nonstandard" plan provisions - ones that are not part of the form or that deviate from it - are listed in a particular section at the end of the plan.

The effort to create a national plan form resulted in Official Bankruptcy Form 113, a copy of which is available here (the "National Plan"). However, the National Plan is not truly "national," as it will not be used throughout the United States. A significant number of bankruptcy judges, trustees, and lawyers opposed either the idea of a national plan or particular provisions in the National Plan. Therefore, an opt-out was created that allows jurisdictions to create their own local plans so long as those plans are structured similarly to the National Plan, in order to preserve the benefits of uniformity and clear disclosure on certain key issues. For example, local plans are required to include an initial paragraph that indicates whether the plan avoids liens or values property that serves as collateral and to list nonstandard provisions in a particular section at the end of the plan.

In Virginia, the National Plan will be used in the Western District of Virginia (which includes the bankruptcy courts based in Roanoke, Lynchburg, and Harrisonburg) but not in the Eastern District (which includes the bankruptcy courts based in Richmond, Alexandria, Norfolk, and Newport News). A new form plan for the Eastern District of Virginia has been drafted but not yet finalized. A red-line version of the draft showing the differences between the existing plan and the draft is available here.

From a lender's perspective, the new form plans do not break significant new ground in terms of substance. As with existing Chapter 13 plans in Virginia, the National Plan and the new form plan for the Eastern District of Virginia can, subject to a lender's objection, be used to (a) "cram down" a lender by setting the value of its collateral and paying in full only that value (with any claim amount above that value being paid only in part as an unsecured claim),² and (b) strip off judicial liens and non-possessory, non-purchase money liens on certain kinds of goods that impair exemptions to which the debtor is entitled. Therefore, while the new form plans are a step in the direction of clearer disclosures, lenders should continue to carefully review proposed Chapter 13 plans to ensure they are accurate and consistent with the lender's rights.

II. New Bankruptcy Rules

a. Substantially Shortened Time to File a Proof of Claim (Bankruptcy Rule 3002)

The deadline to file a proof of claim is being substantially shortened, and lenders should consider revising their procedures for handling bankruptcy filings to ensure that the new deadline won't be missed.

For Chapter 13 cases filed on or after December 1, 2017, the deadline will drop from roughly 120 days after the date of the bankruptcy filing down to 70 days. For a creditor that holds a security interest in the debtor's principal residence - i.e., a mortgage holder - the 70-day deadline applies to (a) the Proof of Claim form (Official Form 410), (b) the Mortgage Proof of Claim Attachment (Official Form 410-A), and (c) an escrow account statement prepared as of the date of the bankruptcy filing in a form consistent with applicable nonbankruptcy law (assuming the creditor established an escrow account in connection with the loan). However, a mortgage holder has up to 120 days after the date of the bankruptcy filing to file a copy of the writing upon which its claim is based (e.g., a promissory note) and evidence that the mortgage is perfected (e.g., a copy of the recorded deed of trust). Those extra 50 days reflect the fact that a mortgage holder may need additional time to gather loan documents if, as is often the case, it is not the original lender.

The same 70-day deadline will apply in Chapter 7 cases. However, in almost all Chapter 7 cases the court first instructs creditors to not file claims, since most Chapter 7 cases are "no asset" cases that produce no recovery to creditors. In the few Chapter 7 cases in which it turns out there will be a recovery to creditors, the court will send a subsequent notice to file proofs of claim, and those notices will continue the current practice of setting a 90-day deadline.

b. New Procedure to Have Lien Declared Satisfied (Bankruptcy Rule 5009(d)

A recurring theme in new bankruptcy rules in recent years has been trying to prevent misunderstandings between secured lenders (particularly mortgage lenders) and debtors regarding the status of a loan. For example, (a) Rule 3002.1 (which we wrote about here) became effective in 2011, and generally speaking it requires a mortgage lender to send a Chapter 13 debtor notices of payment changes during the bankruptcy case and to advise the debtor at the end of the case whether the loan is current, and (b) the Mortgage Proof of Claim Attachment (which we wrote about here) became effective in 2015 and requires the lender to provide a more complete picture of a loan's history and status than had previously been required.

New Bankruptcy Rule 5009(d) is another step in the same direction. The new rule provides in relevant part that a Chapter 13 debtor can file and serve a lender a motion asking the court to enter an order declaring that a lender's secured claim has been satisfied and that its lien has been released pursuant to a confirmed Chapter 13 plan. The stated purpose of the rule is to allow the debtor to get a document he may need to clear a lien from title, but as with other new rules in recent years, it fosters communication between debtor and lender during the bankruptcy case that helps to prevent misunderstandings and the litigation that may ensue. While such a motion is likely to be used most often at the end of a Chapter 13 case - when the debtor has made all of the payments on the lender's secured claim - it can be used at any time. Obviously, an order that incorrectly deems a lender's lien to have been released can have severe consequences for the lender, so lenders should promptly review any papers received from a debtor to ensure that liens will be preserved as appropriate.

III. Court Ruling: Chapter 13 Debtor Not Eligible to Receive Discharge Because of Post-Petition Mortgage Arrears. Procedural Fix Under Consideration

In January 2017, the U.S. District Court for the Eastern District of Virginia affirmed the bankruptcy court's ruling that a Chapter 13 debtor could not receive a bankruptcy discharge because she did not make all of the post-petition mortgage payments she was supposed to make directly to her mortgage lender.³ The debtor had cured her pre-petition mortgage arrearage through payments to the bankruptcy trustee and had made all other required payments to the trustee. The two courts concluded, however, that because her plan also required her to make the post-petition payments directly to the lender, but she had not done so, she was not eligible to receive a discharge.

The courts' decision is important because the fact scenario at issue is very common. Many (perhaps most) Chapter 13 plans are structured in the same way - i.e., the debtor is to cure a pre-petition mortgage through the bankruptcy trustee but is to make the post-petition payments directly to the lender - and debtors are sometimes behind on their post-petition payments when their bankruptcy case comes to an end. Therefore, the decision means that some debtors will not receive a bankruptcy discharge even though they've spent years making payments in Chapter 13. Lenders should not lose sight of this ruling and should confirm that a borrower who has gone through Chapter 13 has actually received a discharge, as opposed to her case simply being dismissed without a discharge.

There is an effort underway to generate a procedure that in future cases will reduce the odds that a Chapter 13 debtor is denied a discharge because she is behind on post-petition mortgage payments at the end of her case. It is not yet clear what that procedure will be, but it may well take the shape of requiring lenders to report to the bankruptcy trustee on a regular basis - perhaps annually - regarding the extent to which the debtor is behind on her post-petition payments. The goal of such a procedure would be to give the trustee and the debtor warning of the problem early enough that the debtor may be able to fix it before the end of her case. One might wonder why lenders should be burdened with such a requirement when (a) the debtor should already know the extent to which she has not made her payments and in any event can simply call the lender for the necessary information, and (b) lenders already need to comply with providing notices under Rule 3002.1 and with the often laborious Mortgage Proof of Claim Attachment.

IV. Conclusion

Chapter 13 continues to evolve, with increasing emphasis on uniformity across jurisdictions and promoting effective communication between the debtor and the creditors, particularly mortgage lenders. That evolution is creating a fairer and more efficient Chapter 13 process for all, but the tradeoff for lenders has been increased reporting burdens and now a tighter claim-filing deadline. It is reasonable to expect more of the same in the future. Lenders should continue to (a) regularly review their bankruptcy procedures to ensure compliance with new rules, and (b) promptly and carefully review any bankruptcy-related papers they receive from a debtor, a trustee, or the court.

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[1] United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S. Ct. 1367, 176 L. Ed. 2d 158, 2010 U.S. LEXIS 2750 (2010).

[2] The existing exceptions for most mortgage claims and for purchase-money claims secured by vehicles or other property purchased within certain amounts of time prior to the bankruptcy filing will continue to apply.

[3] Evans v. Stackhouse, 564 B.R. 513 (E.D.Va. 2017).