Our November, 2011 article covered pending changes to the Federal Rules of Bankruptcy Procedure governing proofs of claim in individual debtor cases. These rules become effective December 1, 2011, and all lenders should be aware of and comply with them. That article can be found here.
For individual debtors in Chapter 11, 7, and 12 cases, and Chapter 13 cases not involving principal residence mortgage claims, creditors will need to use the new Proof of Claim form and comply with more robust requirements for attaching documents to support the claim. The new Proof of Claim form is linked here. It generally is similar to the prior form, but the instructions require the creditor completing the form to submit more, and more detailed, documentation to support the claim.
Where the creditor’s claim includes pre-bankruptcy interest, fees, expenses, or other charges, the creditor must file an itemized statement of these charges with the proof of claim. Further, if the creditor claims a security interest in the debtor’s property, a statement of the amount necessary to cure any monetary default as of the date of the bankruptcy filing must be filed with the proof of claim.
Security Interests in the Debtor’s Principal Residence.
Big changes are in store for creditors holding a security interest in the debtor’s principal residence, when the debtor also proposes to retain the principal residence and maintain regular payments to the creditor.
In addition to the new proof of claim and attachment requirements, the creditor must be alert to four additional issues:
(i) Mortgage Proof of Claim Attachment to the proof of claim
The creditor must attach to its proof of claim a Mortgage Proof of Claim Attachment (linked here) providing substantially greater detail about the primary-residence mortgage claim, at the time the case was filed. Note that (where applicable) the creditor must also supply an escrow accounting that complies with applicable non-bankruptcy law (normally, RESPA).
(ii) Notice of Mortgage Payment Change form
Whenever the amount of the mortgage payment that the debtor (or trustee) must pay will change, the creditor must file and serve a Notice of Mortgage Payment Change (form linked here) not less than 21 days before the payment changes. Such payment changes may result from escrow adjustments and/or interest rate adjustments. If the payment change is due to an escrow payment change, the creditor must also file an escrow accounting with this Notice.
(iii) Notice of Post-Petition Fees, Expenses, and Charges form
For any fees, expenses, charges or costs that the creditor incurs and wishes to attach to the loan, it must file and serve a Notice of Post-Petition Fees, Expenses, and Charges form within 180 days of incurring the expense. Failure to do so may preclude recovery of this amount from the debtor or the collateral. The form is linked here.
(iv) Trustee’s Statement at the end of the case and/or any objections to the claims or notices mentioned above.
These filings place the debtor, debtor’s counsel, and trustee on notice of developments with the mortgage loan. The creditor should be alert to any objection that it may receive to its Proof of Claim, Notice of Payment Change, or Notice of Post-Petition Fees, Expenses, or Charges and respond timely to such objections.
At the end of a bankruptcy case, or upon completion of all arrearage payments to the creditor, the Trustee is required to send out a “Notice of Final Cure Payment.” This notifies the creditor that the Trustee has made the final payment (if any) to the creditor for any pre-bankruptcy arrearage and that the loan should be current. The creditor has 21 days to respond to this notice or can be deemed to have waived any uncured pre-bankruptcy arrearage.
The Proof of Claim, the Notice of Mortgage Payment Change, and the Notice of Post-Petition Mortgage Fees, Expenses, and Charges must be signed and are filed under penalty of perjury by the signer. Failure to comply with these requirements can result in the court imposing sanctions, including attorneys’ fees and costs, rejection of proposed changes, and the possible loss of some of the creditor’s mortgage claims. The rules require that the Notice of Mortgage Payment Change and the Notice of Post-Petition Mortgage Fees, Expenses, and Charges be filed with the court and served on the debtor, the debtor’s counsel, and the trustee.
It is critical that lenders establish internal protocols to ensure timely preparation, filing, and service of the Notice of Mortgage Payment Change and Notice of Post-Petition Mortgage Fees, Expenses, and Charges to avoid the loss of important rights or the imposition of sanctions. For example, whenever a mortgage payment will change, the creditor must file the Notice of Mortgage Payment change not less than 21 days before the change. Likewise, creditors should either file a Notice of Post-Petition Mortgage Fees, Expenses, and Charges whenever an expense is incurred or review the files at least once every 150 days and file a blanket notice for all expenses incurred since the last review.
In summary, creditors should be using the new Proof of Claim form, attaching copies of all applicable required documents, and including a statement of the amount necessary to cure any secured arrearage and a statement of any pre-bankruptcy fees, charges, or expenses. Mortgage lenders secured by a lien on the debtor’s primary residence must also use the Mortgage Proof of Claim attachment, Notice of Mortgage Payment Change form and Notice of Post-Petition Mortgage Fees, Expenses, and Charges form. Creditors are encouraged to consult with counsel with regard to any questions about the use of any of these forms.
There are many unanswered questions regarding the use and applicability of these new forms, for instance, the use of the Notice of Mortgage Payment Change for a Home Equity Line of Credit for which the payment adjusts monthly. We expect that more guidance related to these rules will develop over the next six to twelve months as issues and questions come before the bankruptcy courts nationally. Stay tuned for updates.