Bradley’s Bankruptcy Basics: Chapter 13 Bankruptcy — Consumer Bankruptcy with a Payment Plan | Bradley Arant Boult Cummings LLP
Chapter 13 bankruptcy offers relief only to people with regular income. This chapter is most often used by debtors who have sufficient monthly disposable income to make certain payments over time to their creditors. Chapter 13 debtors often have enough equity in their residence that, if they were to file a Chapter 7 application, the residence would likely be sold for payment to creditors. Often filed to avoid foreclosure, Chapter 13 allows debtors to save their home and / or car, which includes processing overdue payments and continuing monthly payments through a three to five year payment plan.
Chapter 13 cases require careful follow-up by creditors to ensure that bankruptcy events affecting claims or creditors’ collateral are dealt with in a timely and efficient manner. We have set up a high-level overview or ‘timeline’ of a chapter 13 case, emphasizing concepts and milestones of particular importance to creditors. Chapter 13 contains a number of specialized requirements for residential mortgagees, which are also included in the schedule. We have also created a preliminary checklist to help you navigate the early stages of Chapter 13 bankruptcy.
Proof of claim
Because creditors are paid through a plan, creditors must file proof of claim in Chapter 13 cases. (Note that proof of claim must also be filed in Chapter 11 cases, as well as in Chapter 7 cases in which the Chapter 7 trustee has identified assets to liquidate.) A proof of claim describes how much the debtor owed a particular creditor as of the date the bankruptcy petition was filed. The claim is designated as secured or unsecured, and the documents justifying the existence of the claim, including proof of collateral, are attached. Creditors must file their proofs of claim within the time frame specified in the bankruptcy notice. If the deadline is not met, the creditor’s claim may be rejected and no payment will be made against it. Future blog posts will describe the proof of claim filing process in more detail.
The plan of chapter 13
Within 14 days of filing the petition, Chapter 13 debtors must file a draft Chapter 13 plan. Bankruptcy courts often have Chapter 13 plans “forms” that debtors complete and file. The plan describes the amount of disposable income that the debtor will pay to its creditors, including the amounts that the various categories of creditors will receive during the three or five year period of the plan. Although the Bankruptcy Code does not allow debtors to change mortgages on their primary residences through Chapter 13 plans, debtors can pay off mortgage arrears over the course of the plan to bring the loan up to date.
Creditors should carefully consider the terms of the Chapter 13 regime to determine how their claims will be handled. The Chapter 13 trustee will make payments to creditors. However, some regimes provide for certain claims to be paid to creditors directly by the debtor “outside the regime”. Depending on the terms of the plan, confirmation order, or local bankruptcy court rules, stay relief or other reliefs may be available to a creditor without further court order if the debtor stops making payments. outside the plan. If it is a “driven” plan, that is to say the debtor pays the trustee, who then pays the creditors; the creditor must seek relief from the stay before exercising state law remedies if payment stops during the case.
Changes in amounts due during a Chapter 13 plan
Chapter 13 plans last for at least three years, most extending for five years. (Longer plans are now allowed if the debtor has been affected by COVID-19, which we’ll cover in future articles.) During this time, the amounts that debtors may owe, especially for debts secured by mortgages, fluctuate due to annual escrow analyzes, interest rate adjustments and other fees or costs that are recoverable from the debtor under the loan documents. To be paid for these modified or additional fees, creditors must file certain forms in the case of bankruptcy. More information on payment change notices, post-petition fee notices, and responses to final remedy notices will be included in future blog posts.
Payment modification notice
Bankruptcy Rule 3002.1 requires creditors whose debts are secured by the principal residence of the debtor (usually mortgage agents or lenders whose debts are secured by mortgages) to file at least a “payment modification notice” 21 days before the date on which the new payment amount is due. Typical payment changes for which a payment change notice should be filed are annual escrow reviews and interest rate adjustments for variable rate mortgages. The payment modification notice must be filed on the official form.
Post-petition fee notice
Bankruptcy Rule 3002.1 also requires creditors whose claims are secured by the debtor’s primary residence to file notices of any fees or costs incurred after the bankruptcy filing (that is to say post-claim) and are collectable from the debtor in accordance with the loan documents. Post-petition costs can include, for example, attorney’s fees to analyze the creditor’s treatment under a Chapter 13 plan or the costs of a broker’s pricing opinion (BPO). Post-request notices of costs must be filed on the official form. Creditors have 180 days to submit their post-petition charge notices or the claim is time-barred.
Chapter 13 Loan Modifications
Debtors who file under Chapter 13 to save their homes from foreclosure are often interested in modifying the loan secured by their primary residence. Many bankruptcy courts have their own mortgage modification mediation procedures to facilitate this process. If the parties enter into a loan modification agreement, that agreement will likely be subject to the approval of the Chapter 13 trustee or the bankruptcy court. Parties should follow local rules, administrative orders, court-specific loss mitigation program procedures, or court preferences to ensure that the agreement is properly approved.
Notice of final cure
Creditors whose debts are secured by mortgages should be on the lookout for the Chapter 13 trustee filing a final payment notice at the end of the plan period. If the debtor’s Chapter 13 plan provided for the repayment of mortgage arrears during the plan, the final payment notice will indicate the trustee’s determination that all amounts necessary to remedy the arrears claim have been paid.
Creditors must file a response to the final payment notice within 21 days of service of the notice. This response will indicate whether the creditor agrees that all arrears have been paid. The response will also indicate whether any post-application mortgage amounts remain unpaid. Insofar as the creditor asserts that the arrears have not been settled or that the post-petition amount remains unpaid, the creditor must detail these amounts.
Although Chapter 13 debtors generally do not receive a discharge for long-term mortgage debt, creditors will nonetheless be bound by the information included in their response to the final payment notice. Failure to file a response can be viewed as an agreement with the information in the Chapter 13 Trustee’s final payment notice, which can also be binding on creditors whether or not the final adjustment notice is correct.