United States: Pending Changes To Federal Bankruptcy Rules Could Negatively Impact Residential Mortgage Lenders

Last Updated: June 28 2017
Article by Harris Winsberg, Richard E. Hagerty and Meghan J. Wells

The U.S. Supreme Court has approved changes to the Federal Bankruptcy Rules that, if they become effective, will result in important alterations to the filing of proofs of claim by residential mortgage lenders in Chapter 7, 12 and 13 cases. A proposed change to Bankruptcy Rule 3002 will shorten the time within which a creditor must file a proof of claim in a Chapter 7, 12, or 13 case to 70 days after the order for relief (typically, the filing of the bankruptcy petition). The current rule allows claims to be filed within 90 days after the first date set for a meeting of creditors. While a claim that is not timely filed will not be allowed, the new rule will clarify that a lien that secures a claim against a debtor is not void solely because a proof of claim is not timely filed.

Another change to Rule 3002 will permit creditors to seek an extension of the time to file a proof of claim for up to an additional 60 days, on motion filed either before or after expiration of the initial deadline, if they can show either that notice was insufficient because the debtor failed to timely file the list of creditors' names and addresses required by Rule 1007(a), or the notice was insufficient and the notice was mailed to the creditor at a foreign address. The new rule will also permit a mortgage proof of claim to be treated as timely so long as it is filed within 70 days of the order for relief and accompanied by the attachments prescribed by Official Form 410A (detailing monthly payments, arrearages, escrows, etc.) and the mortgage lender subsequently files written evidence of the indebtedness giving rise to the claim and proof of perfection of the security interest not later than 120 days after entry of the order for relief.

In a potentially dramatic change to the way in which mortgage loans and other secured claims are treated in Chapter 12 and 13 cases, new Rule 3015 will permit a Chapter 12 or 13 plan to make determinations about the amount of a secured claim, which will be binding on the claimholder even if the holder files a contrary proof of claim or the debtor schedules that claim in a different manner, and regardless of whether an objection to that claim has been filed. Coupled with a new requirement that objections to Chapter 12 and 13 plans must be filed at least 7 days before the date set for the confirmation hearing (current rules permit filing "before" confirmation of the plan), these changes will make it essential for mortgage lenders and other secured creditors in Chapter 12 and 13 cases to review proposed plans early, and to confirm that they do not have any objections to a debtor's proposed valuation of the collateral. Failure to do so could result in the undervaluation of a mortgage claimant's collateral, and in the case of the holders of second priority mortgages, the potential stripping of the unsecured portion of those liens.

Other changes to the Bankruptcy Rules will require all bankruptcy courts to either use an official form Chapter 13 plan or adopt a local form that contains substantially the same information as the official form; affect the manner in which objections to claims are filed and decided; and permit a debtor to avoid a lien or other transfer of property exempt under the Bankruptcy Code by motion instead of through an adversary proceeding.

The Judicial Conference approved these proposed rules changes in September 2016, and they were approved by the Supreme Court and sent to Congress for review on April 27, 2017. If Congress does not disapprove the proposed changes, they will go into effect on December 1, 2017.

The Troutman Sanders' Consumer Financial Services Law Monitor blog offers timely updates regarding the financial services industry to inform you of recent changes in the law, upcoming regulatory deadlines and significant judicial opinions that may impact your business. To view the blog, click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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