We previously provided you with some of the American Bankruptcy Institute’s Commission on Consumer Bankruptcy’s recommendations to improve the consumer bankruptcy system. As the commission noted, changes in bankruptcy law occur slowly. The last major amendments to the Bankruptcy Code were in 2005, and the last major amendments to the Bankruptcy Rules were in 2011. Despite the post-recession changes in the rules and local practice regarding mortgage servicing for borrowers in bankruptcy, gaps still exist, and the existing law often fails to effectively balance the interests of borrowers, mortgage servicers, the judicial system and other interested parties. Here are some suggested changes to address treatment of mortgages in bankruptcy:
Loan Modifications in Chapter 13
- Uniformity and transparency should be encouraged.
- Successful modifications should be approved through the plan modification process.
- Motions to modify a plan should be filed no more than 45 days after agreement to the terms of modification.
- Attachments to the motion should contain particular information about the terms of modification.
- Amended budget information should be required if the modification changes the original monthly mortgage payment by a substantial amount (>10%).
- Payment change notices (PCNs) should not be required for a payment change resulting from successful modification.
- Reasonable fees should be permitted for borrower’s attorneys relating to work on modifications.
- The commission did not address the necessity of Amended Proofs of Claim to reduce capitalized arrearages; nor did it address the nuances of Trial Period Payments.
Improvements to Rule 3002.1 – Payment Change Notices (PCNs) and Notices of Final Cure
- Untimely Filed PCNs:
- The commission recommends amending Rule 3002.1 to clarify the payment effective date for untimely filed PCNs to give the borrower the benefit of a lower payment early, and bar creditors from collecting a higher payment before they fully comply with the 21-day deadline.
- Home Equity Line of Credit
- The commission recommends that only an annual notice be filed, provided that (i) the monthly changes are less than $10, (ii) the notice explains the monthly changes, and (iii) a reconciliation amount for any overpayment or underpayment received during the prior year is included.
- The monthly payment specified in the annual notice would be adjusted upward or downward to account for the reconciliation amount.
- Reverse Mortgages
- The commission recommends amending Rule 3002.1 to clarify that reverse mortgages are subject to the rules’ requirements, except for PCN requirements.
- Notice of Final Cure
- The commission recommends amending Rule 3002.1 to:
- Convert the current notice process to motion practice, allowing for more certainty upon discharge.
- Add a mid-case status review.
- Emphasize and clarify that the creditor’s response is required and must include certain data points, including principal balance owed; date when next installment payment is due; amount of the next installment payment, separately identifying amounts due for principal, interest, mortgage insurance and escrow, as applicable; and amount, if any, held in a suspense account, unapplied funds account, or any similar account.
- Allow the debtor or trustee to file a motion to compel creditor’s statement and for appropriate sanctions if the creditor does not comply with Rule 3002.1.
Conflicts between Proof of Claim and Chapter 13 Plans
- The commission recommends an amendment to the rules to clarify the effect of proofs of claim and Chapter 13 plans with respect to the amount of claims and installment payments.
- The rules should provide that the amount in a timely proof of claim should take precedence over a contrary amount in a Chapter 13 plan regarding:
- If the debtor proposes to cure defaults and maintain payments, the amount necessary to cure any default and amount of the current installment payment;
- The total amount of the creditor’s claim (including amount of a claim subject to lien avoidance under § 522(f)); and
- The amount of a secured claim excluded from § 506.