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New Bankruptcy Rules Increase Scrutiny Regarding The Filing of Secured Claims and Mortgage Proof of Claims

Published on October 3, 2011 in Real Estate. 0 Comments

New bankruptcy rules are set to go into effect on December 1, 2011.  Of concern to secured creditors and mortgage lenders are requirements imposed on filing proofs of claims secured by the debtor’s principal residence and claims based on writings.  The changes are to the Federal Rules of Bankruptcy Procedure Rule 3001 and 3002.1. 

Changes under 3001, which affect secured lenders when a claim or interest in property of the debtor is based on a writing, require the filing of the original document or duplicate with the claim.  If the writing is lost or destroyed, a statement of circumstances of loss must be attached to the proof of claim.  The claim must itemize interest, fees, expenses, and all charges incurred before the petition was filed.  If a default is alleged, the amount to cure the default must also be provided.  An escrow statement reflecting the escrow amount as of the date of filing the bankruptcy petition must be attached to the proof of claim as well. 

Originally, the rule change required filing the last account statement with the proof of claim; however, this rule was withdrawn after public comment.  Instead, rule 3001(c) was added and will go into effect on December 1, 2012.  The change affects claims based on open-end or revolving consumer credit agreements. When filing the proof of claim, the creditor must include the name of the entity from whom the creditor purchased the account, the name of the entity to whom the debt was owed at the time of the last transaction, date of the last transaction, date of the last payment, and the date when the account was charged to profit and loss.
 
Changes under rule 3002.1, which affect mortgage lenders, require mortgagees to notify the debtor, debtor’s attorney, and the trustee of any change in the mortgage payment, interest rate, or escrow adjustment no later than 30 days before the change is set to occur.  The holder of the claim must also file a notice itemizing all fees, expenses, or charges incurred in connection with the claim occurring after filing the bankruptcy case which the holder asserts are recoverable against the debtor or the residence.  This notice must be filed no later than 180 days after the fees are assessed.  Another important change requires the trustee to file a notice of final cure payment no later than 30 days after making the final payment of any cure amount on a claim secured by the debtor’s principal residence.  If an amount to cure exists, the holder must respond within 21 days to the notice and file a statement to supplement the claim itemizing any amount still owed.

The consequences of failing to follow the new rules could result in a creditor losing the right to present the omitted evidence at any hearing, contested matter or adversary proceeding.  Moreover, the court can also sanction the creditor reasonable expenses and attorney fees for failing to comply.  

These new procedures place burdens on creditors that may be difficult to meet.  Creditors already must use the official forms and timely file claims no later than 90 days after the first date set for the meeting of creditors.  It may be difficult for creditors to file a timely claim with the added documentation and itemization requirements.  Jurisdictions vary on whether there is a deadline for filing a secured proof of claim.  Secured creditors, absent exceptional circumstances, should file the claim within 90 days or file a motion to extend the time to file the secured proof of claim.  Even if the secured creditor files the proof of claim, it must be monitored for objections to the claim.

A bankruptcy court in Oregon has taken the issue of failing to respond to an objection to the proof of claim to an extreme.  In that case, the mortgage lender filed a secured proof of claim, however the chapter 13 trustee objected to the claim as the trustee was not satisfied with the documentation attached to the claim.  No response was filed to the objection and the claim was disallowed.  The debtors subsequently completed their chapter 13 plan and received a discharge.  The holder then sought to enforce the debt and foreclose on the property.  The debtors reopened their bankruptcy case and argued that the lender was in violation of the discharge order.  The court held that the mortgage lien was stripped as the claim was not an allowed secured claim, and thus was discharged in the chapter 13.

Creditors should be proactive in ensuring they have the best procedures for obtaining a correct itemization of the account and the official forms used to file claims.  Creditors must also make sure they have a procedure in place to monitor filed claims for objections by the trustee or debtor.  At best, creditors will face difficulty in complying with these new requirements. 

David H. Yunghans is an associate in the Bankruptcy Group located in the Cincinnati office of Weltman, Weinberg & Reis Co., LPA. He can be reached at 513.723.2211 or .

When Spouses Cannot Strip Mortgage Liens in Bankruptcy

Published on April 13, 2011 in Chapter 13, Chapter 7 and Real Estate. 0 Comments

In a previous advisory, titled “Lien Stripping Prohibited if Debtor is Ineligible for Discharge”, the discussion centered on emerging case law that prohibits a debtor from stripping liens on wholly unsecured mortgage claims when that debtor is ineligible for a Chapter 13 discharge.  A recent case out of the Northern District of Illinois Bankruptcy Court adds another barrier to stripping wholly unsecured liens – when property is held in a tenancy by the entirety, and only one spouse seeks to strip the lien.[1]

In this case, both the husband and the wife filed a Chapter 13 bankruptcy, but the husband was ineligible for a Chapter 13 discharge because he received a Chapter 7 discharge within four years of filing the case. The wife, however, was eligible for a discharge, and so could conceivably strip the lien.  The plan proposed to strip the second mortgage as wholly unsecured, and an adversary proceeding was filed to determine the secured status of the mortgage lien.  If the husband could not strip the lien, the question became:  could the wife do it for both, or only as to her interest?  The creditor argued that she could not do either, and the court agreed.

Most states recognize tenancy by the entirety as a form of property ownership. Each state may vary its characteristics. But the fundamental aspect remains the same – only married couples may hold property in a tenancy by the entirety.  This is an ancient form of property ownership which, while it recognizes two individuals as owners of a property, it also recognizes only one tenant of the property, that is, the marriage.  In other words, neither spouse has an individual slice of the property. Both together own it all.

Spouses may only affect the property by acting together, but individually they cannot.  For example, neither can mortgage the property without the other’s consent, but together they both can.  Conversely, a creditor cannot hold a lien on only one spouse’s interest, only on the whole of the marital entity’s interest, the whole property. 

Using this reasoning, the judge held that when property is held as a tenancy by the entirety, a lien strip may occur only when both spouses are acting as one. In this case both spouses signed the note and granted a second mortgage on their residence. But, because only one spouse could conceivably strip the lien due to the other’s ineligibility for discharge, neither spouse could do it.

When only one spouse seeks to strip a lien, determine whether the property is held in a tenancy by the entirety. If only one spouse seeks to strip a lien, research whether the property is held in a tenancy by the entireties.  If both spouses seek to strip a lien, verify that neither is ineligible for a discharge.  Consult with your local bankruptcy counsel to review the state law as to tenancy by the entirety and advise you how to proceed.

If you have any questions on this matter, please contact Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached at 312.253.9614 or .

[1]Erdmann v. Charter One Bank (In re Erdmann), 2011 Bankr. LEXIS 845 (Bankr. N.D. Ill. Mar. 10, 2011)

New Jersey Bankruptcy Court Rejects Debtor’s Attempt to Avoid Lien in a Chapter 7 Case

Published on August 25, 2010 in Chapter 7 and Real Estate. 0 Comments

Following the trend of a majority of the Circuit Courts, the United States Bankruptcy Court for the District of New Jersey concludes that a Chapter 7 debtor may not void a lien under §506(d) where the claim is wholly unsecured.  This is an important decision for creditors as it solidifies the principle that a wholly unsecured lien on real property will survive a Chapter 7 bankruptcy unaffected.  For example, a Chapter 7 debtor owns real property with a fair market value of $125,000, which is encumbered by two liens.  The first mortgage is in the amount of $150,000 and the second is in the amount of $35,000.  Based on the ruling of a majority of jurisdictions, the second mortgage (which is wholly unsecured) would survive the bankruptcy unscathed.

In this New Jersey case, a Chapter 7 debtor filed a motion to reclassify a wholly unsecured second mortgage on his primary residence from a secured claim to unsecured, relying on §506(a) and (d).  Section 506(a) bifurcates and reclassifies claims into secured and unsecured status.  The claim is secured to the extent of the value of the creditor’s interest in the property, and unsecured to the extent that the amount of the claim exceeds the value of the creditor’s interest in the property.  Section 506(d) provides for a mechanism to avoid a lien that secures a claim that is not an allowed secured claim.

The court observed that although the debtor’s motion was styled as a motion to “reclassify,” the debtor was actually attempting to void the lien under §506(d).  Citing to the Supreme Court’s decision in Nobelman v. American Savings Bank and the Third Circuit’s ruling in In re McDonald, the Chapter 7 debtor attempts to draw a distinction between “stripping off” and “stripping down” a wholly unsecured lien.  However, the court rejects the debtor’s argument, concluding that the Supreme Court’s decision in Dewsnup v. Timm, precludes the voiding of a lien under §506(d) in a Chapter 7 case where the claim is wholly unsecured. 

To reach this conclusion, the court analyzes several Supreme Court and Circuit Court decisions.  In Dewsnup, a Chapter 7 debtor sought to avoid the unsecured portion of a mortgagee’s lien.  Reading §506(a) and §506(d) together, the debtor argued that because under §506(a), a claim is secured only to the extent of the judicially determined value of the real property on which the lien is fixed, a debtor can void the lien pursuant to §506(d) to the extent the claim is no longer secured and thus is not an “allowed secured claim.”  The Supreme Court disagreed and held that §506(d) does not allow debtor’s proposed “strip down,” because the mortgagee’s claim is secured by the lien and has been fully allowed pursuant to §502, and therefore, cannot be classified as “not an allowed secured claim” for the purposes of §506(d).  The Court rejected the debtor’s position that the words “allowed secured claim” must take the same meaning in 506(d) as in 506(a), that is to be read as allowed “secured claim.”  The Court reasoned that Congress must have had a full understanding of the pre-Code rule that liens pass through the bankruptcy unaffected, and, “given the ambiguity in the text, the Court was not convinced that Congress intended to depart from that rule.” 502 U.S. 410, 112 S. Ct. 773, 116 L.Ed. 2d 903, (1992).  “The words in 506(d) need not be read as indivisible terms of art defined by reference to 506(a) but should be read term-by-term to refer to any claim that was, first, allowed—as in the case at hand has been pursuant to 11 U.S.C 502—and second, secured, thereby voiding liens only when the claims they secure have not been allowed.”  Id. at 417.

In Nobelman v. American Savings Bank, a Chapter 13 debtor, relying on §506, sought to bifurcate an understated claim, make regular payments toward the “secured” portion of the claim, while paying zero to unsecured creditors, which included the bifurcated “unsecured” portion of the claim.  Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L.Ed.2d 228 (1993).  The Supreme Court held that the debtor’s proposed plan is prohibited under §1322(b)(2), which provides that a Chapter 13 plan may “modify the rights of holders of secured claims, other than a claim secured by a security interest in real property that is the debtor’s principal residence.”  In other words, this section prohibits the modification of an undersecured claim against a debtor’s principal residence.  Id. at 328.  The court again looked at the wording of the statute and concluded that the use of the phrase “claim secured …by” instead of “secured claim,” in §1322(b)(2), indicates an intent to “encompass both portions of the undersecured claim.”  Id. at 331. 

Thus, under Nobelman, if there is some value in the debtor’s principal residence to which the creditor’s lien may attach, the antimodification provision in  §1322(b)(2) will protect the creditor’s rights as they relate to both the secured and unsecured portions of the claim.

The question presented by this New Jersey debtor is whether a “strip off” rather than a “strip down” of a wholly unsecured lien is permissible in a Chapter 7 case.  A majority of courts addressing this issue concluded that there is essentially no distinction between “stripping off” and “stripping down” wholly unsecured liens, and that both actions are prohibited by the Supreme Court’s decision in Dewsnup. 

The vast majority of courts do not allow the avoidance of wholly unsecured or undersecured liens in Chapter 7 proceedings.  However, a minority of courts still reason that Dewsnup is limited by its facts to the application of cases of partially secured claims, and, therefore, allow the avoidance of wholly secured claims.

In Ryan v. Homecomings Fin. Network, 253 F.3d 778 (2001), the Fourth Circuit Court of Appeals held that although junior lien holders have limited opportunity to recover their unsecured claims, the parties bargained for their positions with knowledge that a superior lien existed.  Nonetheless, “under a Chapter 7 proceeding, they are entitled to their lien position until foreclosure or other permissible final disposition is had.”  Id.

In In re Talbert, 344 F.3d 555, the Sixth Circuit set forth three bases for the Supreme Court’s holding in Dewsnup: “(1) any increase in the value of the property from the date of the judicially determined valuation to the time of the foreclosure sale should accrue to the creditor” (otherwise it would create a “windfall for debtors); “(2) the mortgagor and mortgagee bargained that a consensual lien would remain with the property until foreclosure; and (3) liens on real property survive bankruptcy unaffected.”

Applying these principles, the court held that to allow a “strip off” would be in contradiction to the pre-Code rule that real property liens pass through the bankruptcy unaffected.  Additionally, a “strip off would rob the mortgagee of the bargain it struck with the mortgagor”, i.e., that the consensual lien would remain with the property until foreclosure. 

In In re Laskin, the Ninth Circuit Bankruptcy Panel drew a distinction between the application of §506(d) in a Chapter 7 and that in a Chapter 13.  The court noted that unlike in a Chapter 13, where the claim must be allowed or disallowed to determine what is paid through the plan, and where the determination of a creditor’s secured status is relevant, “the allowance of a secured claim, or determination of secured status is meaningless in a Chapter 7 where the trustee is not disposing of putative collateral.”  In re Laskin, 222 B.R. 872 (B.A.P. 9th Cir. 1998).

Rejecting the debtor’s argument that Nobelman and McDonald compel the voiding of a lien in a Chapter 7 where the lien does not attach to some existing value in the property, the New Jersey Bankruptcy court reasoned that the question of voiding a lien on a wholly unsecured claim depends on whether the debtor’s case is filed under Chapter 7 or Chapter 13.  In Chapter 13, there must first be a determination whether a junior lien holder has a secured claim for purposes of §1322(b)(2).  In a Chapter 7 context, determination of the value in the collateral is irrelevant for purposes of §506(d), as long as the claim is allowed under §502.  Thus, the court concluded that in the instant matter, the claim sought to be avoided is both allowed and secured by the debtor’s property.

A major policy consideration in rejecting the debtor’s position is the implication “strip down or strip off” would have on the creditor’s right in the property.  The courts conclude that even the “fresh start” policy cannot justify an impairment of the creditors’ property rights because the fresh start does not extend to a claim against the property, but rather, is limited to a discharge of personal liability of the debtor.  Another consideration for disallowing the relief sought by the debtor is the potential windfall a “strip off” would create.  Because the unsecured creditor would lose any increase in the value of the property by the time of the foreclosure sale, the increase in value would accrue to the benefit of the debtor.

This is an important decision because it precludes debtors from divesting the creditors’ of their rights in the property.  This decision supports the principle that wholly unsecured liens pass through the Chapter 7 bankruptcy unaffected. 

As more and more courts consider this issue, Weltman, Weinberg & Reis Co., LPA will continue to monitor the status of the lien avoidance cases and keep you apprised of the trends and new developments in the law. 

If you have any questions on this matter, please contact Ms. Karina Velter, Esq. Karina is an associate in the Bankruptcy Group of the Weltman, Weinberg & Reis Co., LPA Philadelphia office. Karina can be reached at (215) 599-1500 or via email at .

Treasury Department Issues Guidelines for Use of HAMP in Bankruptcy

Published on March 30, 2010 in Bankruptcy Filings, Homeowners Affordable Modification Program and Real Estate. 0 Comments

A recent post advised lenders and servicers of a strategy proposed by a prominent Chapter 13 Trustee to file bankruptcy and apply for a HAMP modification at the same time. To recap, theoretically, the servicer will lower the mortgage payments and a modification would be in executed within 60 days of filing the bankruptcy, and the plan would be ready for confirmation.  However, this not only overlooks likely delays in the process, but also the three month trial period during which the debtor must make full and timely modified payments before the modification is permanent.  During the process, the servicer can be bound by automatic stay for months while awaiting completion of the modification, and so confirmation.

Now the U.S. Treasury is promoting the idea through its just-issued Supplemental Directive 10-02.  It includes guidelines for HAMP modifications in bankruptcy, which will become effective June 1, 2010.  These guidelines may in some cases help ease the expected delays in Chapter 13 confirmations.

The Treasury acknowledges that the HAMP process may cause delays in Chapter 13 cases, and further permits (but does not require) servicers to extend the trial payment period from three to five months to accommodate any legal proceedings needed to approve the modification or to receive trial payments from the Chapter 13 trustee.  This would obviously create more delay, but gives the servicer control over such an extension.

Even better, servicers can waive the three month trial period when:

  1. Post-petition payments on the loan are current prior to entering into a HAMP agreement; and
  2. The payments are equal to or more than the payment as modified; and
  3. The Bankruptcy Court approves the modification, if necessary; and
  4. The investor agrees to the waiver.

If a debtor qualifies, the Treasury Directive’s waiver provision could prevent months of delay before confirmation, and could allow a plan to be confirmed within 60 days of filing in some cases.

Coordinating HAMP with a Chapter 7 bankruptcy is much less complicated.  The only new requirement applies in the event a debtor obtained a discharge, and a reaffirmation agreement was not filed.  If a debtor later enters into a modification agreement, the servicer must include specific language that it will not hold the debtor personally liable for any debt arising out of the agreement.

In both Chapter 13 and Chapter 7, the servicer may choose (but is not required) to accept bankruptcy schedules and tax returns provided in the case as evidence of income in lieu of the Affidavit of Hardship and Form 4506T-EZ. The only restriction is that the schedules must be less than 90 days old.

These guidelines, where appropriate, are avenues that can reduce delay where a Chapter 13 case is combined with a HAMP application.  However, servicers still need to take quick and aggressive action in this circumstance because all too often, it may lead to unjustified delay.

If you have any questions, please contact Ms. Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., L.P.A. located in the Chicago office. She can be reached directly at 312-253-9614 or via email at .

Beware of Chapter 13 Plans That Depend on HAMP Modification

Published on March 25, 2010 in Chapter 13, Homeowners Affordable Modification Program and Real Estate. 0 Comments

The bills in both the House and Senate which would have allowed bankruptcy judges to modify the terms of certain mortgages died long ago.  However, one prominent Chapter 13 bankruptcy trustee is promoting his own version of reform by promoting the use of HAMP (Homeowners Affordable Modification Program) in concert with a Chapter 13 bankruptcy.  Lenders and Servicers need to be aware of this and the issues it presents.

The idea is to submit an application for a HAMP modification at the same time a Chapter 13 bankruptcy is filed.  Because both require proof of income, a budget, and the debtor’s most recent tax return, it should be “easy” for the debtor’s attorney to submit them to HAMP along with the Request for Modification and Affidavit of Hardship.  Because lenders and servicers are required to respond to applicants within 30 days with a yea or nay, it would in theory dovetail perfectly with the timing of most districts’ confirmation hearings, and result in reduced mortgage payments and so affordable plan payments.

The assumptions behind this idea show its inherent problem – delay.  Among the assumptions are the following: the debtor is a viable candidate for a HAMP modification; the documents the attorney sends are complete and sufficient the first time; the lender or servicer will be able to respond within the 30 days; the debtor can afford the proposed modification; the modification is accepted immediately; the plan will work with the modification; and the modification documents are signed soon after the 30 day response period has passed.  It is more likely that there will be snags in the process and it will not move as smoothly as the trustee assumes.   Debtor’s counsel will certainly use any delay in the HAMP process to delay the Chapter 13 proceedings.

Even if the modification process goes smoothly, a huge delay is overlooked.  Confirmation hearings are usually set within 60-90 days after a case is filed, and plans can be confirmed in 60 days in some jurisdictions. Under HAMP, a signed modification will not be permanent until and unless the debtor pays according to the modification for three consecutive months. Assuming that a plan cannot be confirmed until the modification is finalized, it will be at least 4 ½ months until the plan can be confirmed. Meanwhile, the creditor is bound by the automatic stay.

Moreover, if the debtor cannot afford the existing mortgage payments, how will it be paid after the bankruptcy is filed?  If a post-petition default accumulates, creditors have grounds for relief from stay.  Will courts put off granting relief while a HAMP application or trial period is pending?  More delay.

How could a debtor propose a budget and a plan if he or she cannot afford the current mortgage payments?  If not, the debtor must file a budget and plan that are unfeasible or based on a future unknown payment.  With either option, creditors have grounds for denial of confirmation, dismissal of the case or relief from stay. Will courts delay or deny creditors this relief while a debtor is waiting for a loan modification?  Again, more delay.

Or would debtor’s counsel seek and obtain an extension of time to file a plan and budget while waiting for a HAMP decision?  In cases where a loan modification gets approved, confirmation will be extended to at least 5 ½ months after filing.  In cases where modification is not successful, the case will either have to be dismissed or converted to a Chapter 7.  Again, the creditor is delayed from exercising its state court rights because the automatic stay has been in effect during the Chapter 13 case.

While a HAMP modification plan could be a win-win for both creditor and debtor in certain cases even with the delay it would cause, chances are that the creditor will be frustrated with the process.  Creditors must move aggressively and quickly if a Chapter 13 case is filed that is dependant upon a HAMP modification.

If you have any questions concerning this matter, please contact Ms. Monette W. Cope, Esq. Monette is a Junior Partner in the Bankruptcy department located in the Chicago office. She can be reached directly at (312) 253-9614 or via email at .