Bradley’s Bankruptcy Basics: Chapter 13 Bankruptcy — Consumer Bankruptcy with a Payment PlanChapter 13 bankruptcy provides relief only to individuals with regular income. This Chapter is most frequently used by debtors who have sufficient disposable monthly income to make some payments over time to their creditors. Chapter 13 debtors frequently have enough equity in their residence that, if they were to file for Chapter 7, the residence would likely be sold for payment to creditors. Often filed to stave off foreclosure, Chapter 13 allows debtors to save their homes and/or cars, which includes curing any past due payments and continuing to make monthly payments through a three- to five-year payment plan.

Chapter 13 cases require careful monitoring by creditors to ensure that bankruptcy events affecting the creditors’ claims or collateral are timely and effectively addressed. We’ve put together a high-level overview or “timeline” of a Chapter 13 case, emphasizing concepts and milestones of particular importance for creditors. Chapter 13 contains a number of specialized requirements for residential mortgage creditors, which are included in the timeline as well. We have also created a preliminary checklist to help you navigate the early stages of a Chapter 13 bankruptcy.

Proofs of Claim

Because creditors are paid through a plan, creditors must file proofs of claim in Chapter 13 cases. (Note that proofs 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 either secured or unsecured, and documents supporting the existence of the claim including evidence of security interests, are attached. Creditors must file their proofs of claim by the deadline set forth in the notice of bankruptcy. If the deadline is missed, the creditor’s claim may be disallowed, and no payments will be made toward it. Future blog posts will describe the proof of claim filing process in more detail.

The Chapter 13 Plan

Within 14 days of filing the petition, Chapter 13 debtors must file a proposed Chapter 13 plan. Bankruptcy courts often have “form” Chapter 13 plans that debtors fill out and file. The plan describes the amount of disposable income the debtor will pay toward his creditors, including amounts that various classes of creditors will receive during the three- or five-year plan period. Although the Bankruptcy Code does not allow debtors to modify mortgages on their primary residences through Chapter 13 plans, debtors can repay mortgage arrears over the course of the plan to bring the loan current.

Creditors must carefully review the Chapter 13 plan terms to determine how their claims will be treated. The Chapter 13 trustee will make the payments to creditors. However, some plans provide for certain claims to be paid to creditors directly by the debtor “outside of the plan.” Depending on the plan terms, the confirmation order, or the bankruptcy court’s local rules, relief from the stay, or other relief, may be available to a creditor without further court order if the debtor stops making payments outside of the plan. If it is a “conduit” plan, i.e. the debtor pays the trustee, who subsequently disburses to 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, with most continuing for five years. (Longer plans are now permitted if the debtor has been impacted by COVID-19, which we’ll cover in future posts.) During that time period, amounts debtors may owe, particularly for debts secured by mortgages, will fluctuate due to annual escrow analyses, interest rate adjustments, and other fees or costs that are recoverable from the debtor under the loan documents. To be paid for these changed or additional charges, creditors must file certain forms in the bankruptcy case. More information about payment change notices, post-petition fee notices, and responses to notices of final cures will be included in future blog posts.

Payment Change Notice

Bankruptcy Rule 3002.1 requires creditors with claims secured by the debtor’s principal residence (usually mortgage servicers or lenders whose claims are secured by mortgages) to file a “payment change notice” no less than 21 days prior to the date the new payment amount is due. Typical payment changes for which a payment change notice must be filed are annual escrow analyses and interest rate adjustments for adjustable rate mortgages. The payment change notice should be filed on the official form.

Post-Petition Fee Notice

Bankruptcy Rule 3002.1 also requires creditors with claims secured by the debtor’s principal residence to file notices of any fees or costs that are incurred after the bankruptcy filing (i.e. post-petition) and are recoverable from the debtor pursuant to the loan documents. Post-petition fees can include, for instance, attorneys’ fees for analyzing the creditor’s treatment under a Chapter 13 plan or costs for a broker price opinion (BPO). Post-petition fee notices should be filed on the official form. Creditors have 180 days to submit their Post-Petition Fee Notices or the claim is barred.

Loan Modifications in Chapter 13

Debtors who file under Chapter 13 to save their homes from foreclosure are often interested in modifying the loan secured by their principal residence. Several bankruptcy courts have their own mortgage modification mediation procedures to facilitate this process. If the parties enter into a loan modification agreement, such agreement likely will be subject to the approval of the Chapter 13 trustee or the bankruptcy court. The parties should adhere to local rules, administrative orders, court-specific loss mitigation program procedures, or judicial preferences to ensure the agreement is approved properly.

Notice of Final Cure

Creditors whose claims are secured by mortgages should be on the lookout for the Chapter 13 trustee to file a notice of final cure payment at the end of the plan period. If the debtor’s Chapter 13 plan provided for repaying mortgage arrears over the course of the plan, the notice of final cure payment will indicate the trustee’s determination that all amounts required to cure the arrearage claim have been paid.

Creditors must file a response to the notice of final cure payment within 21 days after service of the notice. This response will state whether the creditor agrees that all arrears have been paid. The response will also state whether any post-petition amounts under the mortgage loan remain unpaid. To the extent the creditor asserts that the arrearage has not been cured or that post-petition amount remain unpaid, the creditor must itemize these amounts.

Although Chapter 13 debtors typically will not receive a discharge with respect to long-term mortgage debt, creditors will nonetheless be bound by the information included in their response to notice of final cure payment. Failure to file a response can be deemed an agreement with the information in the Chapter 13 trustee’s notice of final cure payment, which can likewise bind creditors, regardless of whether the notice of final cure is correct.

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Photo of Elizabeth R. Brusa Elizabeth R. Brusa

Elizabeth Brusa is an associate in the Banking and Financial Services Practice Group focusing on small dollar lending, bankruptcy, and privacy, security and innovation. She is a Certified Information Privacy Professional for the U.S. Private-Sector (CIPP/US). Elizabeth counsels financial services clients on matters…

Elizabeth Brusa is an associate in the Banking and Financial Services Practice Group focusing on small dollar lending, bankruptcy, and privacy, security and innovation. She is a Certified Information Privacy Professional for the U.S. Private-Sector (CIPP/US). Elizabeth counsels financial services clients on matters related to bankruptcy proceedings, bankruptcy fraud and abuse, and Chapter 11 filings.

Photo of Alexandra Dugan Alexandra Dugan

Alex Dugan regularly represents financial services and mortgage company clients with compliance matters, including risk management and remediation, state investigations, regulatory compliance, and operational implementation of legal guidelines. Alex’s practice focuses on the bankruptcy compliance and regulatory concerns that her clients face. She…

Alex Dugan regularly represents financial services and mortgage company clients with compliance matters, including risk management and remediation, state investigations, regulatory compliance, and operational implementation of legal guidelines. Alex’s practice focuses on the bankruptcy compliance and regulatory concerns that her clients face. She is also a member of the firm’s Auto Finance and Payment Systems industry teams.

Photo of Christy W. Hancock Christy W. Hancock

Christy Hancock’s practice is dedicated to financial services regulatory compliance and litigation. Her work with mortgage servicing and financial institution clients has given her a broad base of knowledge regarding laws affecting the mortgage servicing business, including bankruptcy and foreclosure best practices, payment…

Christy Hancock’s practice is dedicated to financial services regulatory compliance and litigation. Her work with mortgage servicing and financial institution clients has given her a broad base of knowledge regarding laws affecting the mortgage servicing business, including bankruptcy and foreclosure best practices, payment application, correspondence requirements, allowable fees, loan modifications, escrow requirements, and property preservation. In recent years, the majority of her practice has focused on advising large financial institutions on bankruptcy-related regulatory matters and large-scale remediation projects.

Photo of Christopher L. Hawkins Christopher L. Hawkins

Chris Hawkins represents clients in a wide variety of bankruptcy and insolvency-related matters across the country. He represents debtors and creditors in out-of-court business restructurings and Chapter 11 bankruptcy cases. Chris represents creditors and financial institutions in bankruptcy-related litigation. In recent years, he…

Chris Hawkins represents clients in a wide variety of bankruptcy and insolvency-related matters across the country. He represents debtors and creditors in out-of-court business restructurings and Chapter 11 bankruptcy cases. Chris represents creditors and financial institutions in bankruptcy-related litigation. In recent years, he has devoted the majority of his practice to advising large financial institutions on bankruptcy compliance and bankruptcy-related regulatory matters.