On December 1, 2011, changes to the Federal Rules of Bankruptcy Procedure (“Bankruptcy Rules”) complicated the filing of proofs of claim by secured creditors in chapter 13 cases. These new rules require secured creditors to file and continually update filed proofs of claim. These rule changes provide an unexpected opportunity for consumer debtors to obtain expedited judicial review of their mortgage debt in case a dispute arises post-confirmation. The theory behind the rule change is that a bankruptcy review of the mortgage debt may provide a res judicata determination of the debt in a subsequent foreclosure action.  

New Bankruptcy Rule 3002.1 seeks to end the confirmed debtor’s problem where she completes her plan payments and finds out afterward she is in default on her mortgage even after obtaining the bankruptcy discharge. This is common in chapter 13 cases where the mortgage claim increases over the life of debtor’s multi-year plan due to a payment increase, tax and insurance adjustments, or other adjustments.

New Bankruptcy Rule 3002.1(c) requires that post-petition changes to monthly loan payments be made known to debtor. Disclosure must be served upon debtor, debtor’s counsel and the chapter 13 trustee for requested post-petition fees, costs, expenses or charges. Notice must be filed within 180 days of when the charge and payment were “incurred.” A hearing will be held if an objection is filed. The time for asserting a dispute is “one year” after “service” of the notice of fee change. Failure to provide proper notice can be costly.

Bankruptcy Rule 3002.1(i) provides for sanctions to ensure compliance. If the secured creditor fails to either file its notice of payment change within 21 days, or file its notice of fees, costs or expenses within 21 days, the bankruptcy court may either preclude the items from being introduced into evidence or award other relief, including an award of fees to the opponent.

The bottom line is the bankruptcy court’s determination could permanently modify the terms and conditions of the secured mortgage debt long after the bankruptcy discharge is filed. The court’s decision should be honored by any state foreclosing court because of the common identities of parties and issues in the Rule 3002.1 determination and a future foreclosure matter.

New Bankruptcy Rule 3002.1 requires the secured creditor and trustee to disclose to debtor the extent of the debt and fully disclose how the adjustments were made. If the time limitations are ignored, creditor’s failure can create a windfall opportunity to debtor in the event of a subsequent foreclosure action.

The new rules are more nuanced than can be explained in a short article. A chart prepared by Mark Diamond, the Operations Manager for the United States Bankruptcy Court for the Southern District of New York can be accessed here.

We urge lenders to review pending chapter 13 cases to determine if any notice needs to be served and filed. Failure to monitor and update mortgage claims may in unintended consequences affecting a later foreclosure action. To those secured creditors facing this situation, we are available to review and consider lender post-petition confirmation policies in connection with chapter 13 cases.

If your borrower has given you notice of a pending chapter 13 case, it is important to pay attention to the enhanced disclosure requirements affecting proofs of claim. To help you understand what’s available and review your particular concerns, feel free to reach out to one of our experienced creditor rights and insolvency attorneys today.

About Michael Moskowitz, Esq. and Weltman & Moskowitz, LLP:

Michael Moskowitz is a founder of the Weltman & Moskowitz, LLP law firm, having offices in New York, New Jersey and Long Island. Mr. Moskowitz’s practice focuses on creditor rights and bankruptcy issues, workouts, commercial litigation and other full service business concerns, including dispute resolution and transactional matters. He may be reached at 212 684-7800 or at mlm@weltmosk.com.