The New National Chapter 13 Laws

By: Bari Gambacorta Stark & Stark P.C., Lawrenceville NJ

The Proposed National Chapter 13

The Advisory Committee on Bankruptcy and Civil Rules has determined that it will strongly suggest revisions to the Chapter 13 process for all United States District Courts. The goal is to streamline the process and make Chapter 13’s friendlier and more efficient for all parties. This will mean the end of local rules governing the practice. The benefit for national and regional creditors will be that that the process will be identical in every District Bankruptcy Court throughout the country.

While the implementation date is currently set at December 1, 2014 there many changes which creditors should recognize now. Creditors should anticipate these major shifts and begin considering their new procedures shortly. There are harsh penalties for creditors missing deadlines or otherwise failing to comply with the new procedures. The intent of the Advisory Committee is to streamline the process. There are far fewer days to obtain copies of the plan, obtain and forward the documents necessary to support the appropriate proof of claims to counsel and then have the proof of claims or objections to chapter 13 plans filed timely. There are even more significant difficulties in order to object to a debtor’s cramdown value. Under the proposed rules the debtor’s plan value will control unless an objection is timely filed. This article is the first of three articles addressing the current proposed rules and their significant impact on Chapter 13 practice for every jurisdiction throughout the United States.

Comments on the proposed rules and procedures are being accepted through February, 2014. Final approval must be authorized by the Supreme Court. Initial proposed changes were published on August 14, 2013 and can be found at:

http://www.uscourts.gov/uscourts/rules/preliminary-draft-proposed-amendments.pdf

Comments are due February 15, 2014. Comments for the proposed changes may be made online to the Advisory Committee at:

http://www.uscourts.gov/RulesAndPolicies/rules/proposed-amendments.aspx

In the spring of 2014 the Judicial Conference Committee on Rules of Practice and Procedure will review and finalize the proposed rules, procedures and forms for the new national chapter 13 practice now being considered by the Advisory Committee. Then in late spring 2014 these finalized procedures will be referred to the Judicial Conference. Thereafter the Supreme Court will review and approve the final rules and forms unless Congress defers, modifies or rejects them. The proposed implementation date for the new procedures and forms is set for December 1, 2014.

There are a number of reasons for the changes cited by the Advisory Committee – lower-cost, more effective education, more effective appeals, potential improvements in procedure and a response to Supreme Court case In re Espinosa, 130 S. CT. 1367 (2010). There the Court held that an order confirming a procedurally improper Chapter 13 plan was entitled to preclusive effect and that bankruptcy judges must independently review chapter 13 plans for conformity with applicable law. The proposed rule changes are primarily designed to implement uniform forms and processes to be utilized in all United States Bankruptcy District Courts. They are also designed to provide adequate notice to interested parties. Unless you are a local practitioner the existing various local rules render it difficult to understand the import of a debtor’s proposed plan and even more critical how to efficiently oppose it. Thus the myriad of local rules governing Chapter 13 procedures have posed difficult hurdles for national and regional lenders. The result has often been delays in the confirmation process which cost all parties time and money.

Understandably the first proposed national Chapter 13 Bankruptcy Rule, 9009, prohibits local modification of the national chapter 13 process. Rule is 3015 (c) makes the use of the proposed Chapter 13 Forms mandatory. Rule 3015 (c) requires special placement of non-standard provisions in the Chapter 13 plan form. This is designed to alert all parties of unusual plan requests. Rule 3002 requires that all nongovernmental claims must be filed before confirmation. Secured creditors must file claims. A lien is not void if no claim is filed but there may be serious consequences for the failure. In order to meet this goal of quicker processing and fewer delays the Advisory Committee has shorted the claim deadline to 60 days after the filing of the bankruptcy petition. This is further shortened when one realizes the debtor has 14 days after the filing of his bankruptcy to file and serve his plan. Recognizing that mortgage proof claims require special supporting documentation, the proposed rules would allow mortgage claim documentation to be added within an additional 60 days – but this still requires an original proof of claim filing within the first 60 days. The additional 60 days is only to attach the supporting documentation.

Another goal of the Advisory Committee is to make certain that the confirmed plan is final. Thus Rule 3012 governs requests to determine the amount of the secured claim. These may be made by motion or by objection to the plan filed in a Chapter 13 case. Rule 3015 sets forth that confirmation of the plan determines the amount of the claim and it is binding on all parties even despite a filed proof of claim with differing amounts unless an objection is filed seven (7) days prior to the confirmation hearing. The Advisory Committee reasons that if they make the claim deadline sufficiently in advance of the confirmation hearing this will require objections to plan treatment to be made early on at the first confirmation date. Rule 3007 states that the claim objection other than value must be made on thirty (30) days notice. This further reduces the timeframe creditors have to prepare, obtain counsel, get supporting documents to them and have their objection filed.

The third goal of the Judicial Conference is to provide adequate notice to creditors. They attend to this by requiring debtors to perform a heightened service similar to that provided under Rule 7004 for claim modification or lien avoidance. Rules 3015 (d) requires service of the full plan.

The proposed plan document sets forth warning boxes which must be checked in order for the debtor to modify claims, avoid liens or provide for non-standard plan provisions. Failure to check the warning box makes the debtor’s unchecked proposed provisions ineffective.

Treatment of Secured Claims and Arrearage Cures

The debtor sets forth the current scheduled payment amounts and any arrears amount. At Section 3.1 of the proposed Plan Form the debtors can maintain the contractual payments setting forth default payment cures as per the schedule listed. The allowed claim amount will be paid under the plan with interest if any, at the rate stated. The amounts listed in the proof of claim filed by the secured party controls over any contrary amounts set forth in Section 3.1 by the debtor. Once relief from stay is granted for that collateral all payments for that collateral will cease and all claims as of that collateral will no longer be treated by the plan.

Valuation Issues

The question of valuation of security and claim modification requires the debtor to check the appropriate warning boxes. The plan controls secured value and the creditor must object to the plan if it is not satisfied with the amounts set forth by the debtor. In a bifurcated claim situation the lenders proof of claim controls the unsecured amount. This proposed approach suggests an unusual situation since in the normal bifurcated secured claim for equipment or vehicle plan the lender might value a vehicle at $20,000 and its unsecured claim at $10,000. The debtor on the other hand may value the secured portion at $10,000 and the unsecured portion at $20,000. Unless the creditor objected the debtor’s valuation would control as to the secured claim for $10,000 and the creditor’s unsecured claim would control at $10,000. This strange result only heightens the degree of diligence creditors face under the proposed National Chapter 13 Plan rules, procedures and forms. Under the proposed process the lien is retained until full payment under the plan or the debtor’s discharge.

Under Section 3.2 if the debtor checks the box the debtor can request that the court determine the value of the secured claim. This is only for non-governmental secured claims. For secured claims of governmental units the amounts listed in the proof claims filed by the government unit under bankruptcy rule 3002 control over any contrary amounts listed. The secured claim will be paid in full along with interest at the rate stated. If the box is not checked and if the amount of the creditor secured claim listed in this section is scheduled by the debtor as having no value the creditor’s allowed claim will be treated entirely as an unsecured claim unless the secured creditor objects. If the box is checked, the amount of the creditor’s claim listed on the proof of claim controls over any contrary amounts. The holder of secured claim listed in this section will retain the lien until the entire amount of the underlying debt is paid or until discharge under 11 USC section 1328. At that time the lien will terminate and must be released by the creditor. Bankruptcy Rule 3015 controls.

Treatment of 910 New Car Claims

Under the bankruptcy code a new car cannot be crammed down within 910 days of its purchase date. In this situation under the proposed rule changes the secured proof of claim amount filed by the secured creditor controls.

There are numerous other noteworthy proposed changes to the chapter 13 practice that will be discussed in subsequent articles. The next article will cover the anticipated impact of the rule changes for leasing creditors.