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The new bankruptcy rules one year later

By Enslen Crowe • Thursday, December 20, 2012

Major changes to the Federal Rules of Bankruptcy Procedure relating to the filing of claims and responsibilities of creditors tookeffect on Dec. 1, 2011. Picture15After approximately a year, there has beenlittle meaningful guidance from the bankruptcy courts in Alabamaregarding the practical impact of the new rules. However, it is clearthat the rules increase the responsibility of creditors related to filingproof of claims and notices with the court. The new rules alsorequire specific, timely and adequate responses from creditors tonotices filed by other parties. If a creditor violates the bankruptcyrules, the creditor now risks sanctions, including but not limited to,the loss of the right to recover some of monies owed.

The biggest change in the new Federal Rules of Bankruptcy procedure involves the requirements for filing a proof of claim in a Chapter 7, 13 or 11 bankruptcy to recover a debt. As pointed out in the 2011 Year End issue of the The Counselor, whether it is a contract, invoices for the sale of goods or some other writing, a copy of all writing(s) in support of such filed claims must be filed with the Proof of Claim. All amounts owed, including, but not limited to, principal, accrued interest, late charges, fees, expenses or other charges owed as of the petition date must be itemized and supported with documentation. This creates a heavier burden on creditors when preparing and filing claims. Instead of filing a proof of claim with incomplete documentation to support the claim, many creditors have decided to file claims for only those unpaid charges and expenses that can be documented in order to comply with the rules.

The new rules and expanded claim forms were intended to provide greater transparency for the debtor(s), and thus, hopefully reduce confusion and unwarranted objections to claims. The key word to these changes is “disclosure.” However, as the year has progressed with the implementation of these new rules, the number of objections to claims filed by debtors seems to be substantially the same or only slightly reduced in the Alabama bankruptcy courts. The heightened proof of claim requirements have also led to more claims being filed after the claims bar date. Creditors are finding it difficult to accumulate all of the supporting documentation for unpaid charges and expenses incurred many years ago or incurred by a prior servicer. Many creditors are spending months researching pre-petition charges and fees. Filing multiple claims after the bar date could have a negative impact on the success of a debtor's Chapter 13 plan.

Another major requirement of the new rules relates to the responsibility of creditors holding a mortgage interest in the debtor's principal residence. The Federal Rules of Bankruptcy Procedure now require that mortgage creditors file a Payment Change Notice no later than 21 days before the payment change takes effect. This new requirement is not only designed to provide ample notice to the debtors about the upcoming mortgage payment change, but it also adds a new area of potential litigation initiated debtors. The past year has shown that debtors are more than willing to object to payment change notices. Mortgage creditors need to be attentive to all details in payment change notices in order to avoid or dissuade litigation in court. To date, there has been little or no guidance from the Alabama bankruptcy courts regarding cases where no payment change notice is filed or cases where the notice is filed within 21 days from the effective date of the new payment amount. For example, if a debtor receives a notice of payment change regarding his home mortgage from a creditor, but the creditor fails to file a timely notice of payment change, the debtor might start paying the new payment amount pursuant to the original notice. If the creditor then files the notice of payment change so that the payment change takes effect in a later month, this could lead to contrary notices of payment change and confusion for the debtor over his or her correct payment amount.

As part of the closing process of a Chapter 13 bankruptcy case, the new Rule 3002.1 requires that the Chapter 13 Trustee must file Notice of Final Cure (Mortgage) Payment stating that a mortgage creditor's claim has been paid as required. The Notices of Final Cure currently adopted in two of the three districts in Alabama also require the mortgage creditor to reply to the notice and confirm that its arrearage claim has been paid in full and whether or not the debtor is contractually current on his or her mortgage loan. Rule 3002.1 states that the creditor must file a response within 21 days of the notice. Failure to file a timely response may result in sanctions imposed on the creditor by the bankruptcy court. When the 21 day deadline is missed, some debtors are beginning file motions to deem their mortgage current. So far, the bankruptcy courts in Alabama rarely sanction a mortgage company, but as more attorneys are learning about the provisions of Rule 3002, this type of litigation regarding sanctions against a mortgage company for failure to respond to the Notice of Final Cure could increase.

Rule 3002.1(c) also requires creditors to file a notice of post-petition fees, expenses or charges relating to a debtor's home mortgage loan. The notice of post-petition fees must be served on the debtor, the debtor's attorney, and the Chapter 13 Trustee. The notice must be filed and served within 180 days after the date on which the charges, expenses or fees were incurred. The Debtor or Chapter 13 Trustee have one year from the date the notice is filed to file a motion to determine the validity of each expense, charge or fee. In order for Creditor to recover such post-petition fees, expenses and charges from a debtor in bankruptcy, the credit must comply with this new requirement.

The bankruptcy courts in Alabama, along with the rest of the federal bankruptcy court system are still coming to grips with what the effects and burden will ultimately be on both creditors and debtors alike. The old rule regarding long term mortgage debts generally held that post-petition charges, fees and other arrearage were not discharged through a Chapter 13 plan and were generally recoverable from the debtor or the collateral even after a debtor was discharged. However, now there are numerous ways that a creditor could effectively waive its right to recover post-petition arrearage on long term debts. As these new rules reach their one-year anniversary since implementation, the courts may not be as forgiving with the deadlines imposed on creditors by the new rules. All creditors and debtors need to continue to pay close attention to the deadlines imposed by the courts and document all charges or payments incurred, whether prior to the bankruptcy filing or after the bankruptcy filing, in order to ensure accuracy in determining the debt and avoid potential litigation.

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