An Overview of the Amendments

Changes affecting the Proof of Claim

Effective December 1, 2011, new Bankruptcy Rules require any lender filing a proof of claim in a bankruptcy proceeding to file attachments therewith, including: 1) an itemized statement of any pre-petition interest, fees, expenses, or charges; 2) a statement of the amount necessary to cure any prepetition default; and, 3) for secured claims in the debtor's principal residence, the B10 Attachment.

The B10 Attachment requires the claimant to list a breakdown of all prepetition fees, expenses, and charges, including the dates incurred for each. It also requires a statement of the principal and accrued interest due on the loan as of the petition date, and a breakdown of all installment payments due as of the petition date. Where the loan has an escrow component, the B10 form requires claimants to attach the most recent escrow analysis in a form consistent with non-bankruptcy law.

Additionally, as has always been a requirement under Bankruptcy Rule 3001(c), those claimants with a secured interest in the debtor's real property evidenced by a writing (e.g., a mortgage or note) must also attach a copy of said writing to the claim. For mortgage lenders in Georgia, Tennessee, and Mississippi, this includes a copy of the recorded security instrument and a properly endorsed note showing a full chain of title.

Changes to Post-petition Disclosure

Under the new rules, mortgage lenders are required to serve and file any post-petition mortgage payment changes at least 21 days before the effective date of the change in a Chapter 13 where the Debtor is curing a default. Further, mortgage lenders must also serve and file an itemized statement of any post-petition fees, expenses or charges, and the date incurred for each within 180 days of incurrence.

In Chapter 13 cases where the debtor is curing a default on a secured claim on the debtor's principal residence, the new rules require the debtor or trustee to serve and file a "Notice of Final Cure" on the lender within 30 days following the debtor's last plan payment. The lender is now required to respond to these notices as supplement to its claim within 21 days of receipt, indicating whether it agrees or disagrees that its claim has been cured and whether the debtor is otherwise current on payments under Section 1325(b)(5). Where a lender disagrees that the debtor is current or has cured the default, the lender must itemize the required cure or post-petition amounts remaining unpaid.

Both Proof of Claim rule changes and newly imposed post-petition disclosure rules are mandatory and allow the imposition of sanctions for non-compliance.

What We Don't Know

As with any new rule, there are uncertainties which will eventually play out in court. The most pressing challenges for lenders involve the time limits and disclosure requirements under the new rules. In some circumstances, obtaining loan information on mortgages that have been recently transferred or service released can be difficult when faced with short timeframes for compliance. Verifying every date and amount for every fee, expense or charge assessed on the loan can also be difficult for counsel, particularly where reading complex loan servicing screens is concerned.

Still looming despite the rule changes are issues such as removing the debtor's personally identifiable information from all documents filed with the court, verifying all information contained in the Proof of Claim is supported by the documents attached thereto, and deciding whether to include post-petition, pre-confirmation attorney fees as an arrearage on an otherwise current loan or as a line item on a payoff quote. Additionally, because the notices of payment change and post-petition fees are supplements to the claim itself (and are now mandatory), it appears that a Proof of Claim is necessary in every bankruptcy case, even if the loan is current at filing.

It also remains unclear whether the fees and costs associated with filing the new post-petition notices are always recoverable. In a circumstance where the claimant is filing the notices of post-petition fees too frequently, for example, every 30 days, a judge is not likely to assess these fees against the debtor. However, where the creditor is filing the notices only frequently enough to comply with the rules and the debtor is paying the arrearages per the underlying mortgage terms, these fees and costs will likely be recoverable.

Finally, there is no clarity on whether a lender can seek waiver of these new requirements where the debtor pays directly, has stripped the lien or surrendered it in the plan, or the lender has received relief from stay.

Tips from Counsel

The best way to ensure compliance with the new Bankruptcy Rules is to first begin a process of auditing all loans currently in bankruptcy. Determine whether any post-petition fees, expenses or charges have occurred on these loans since the petition date and file a "Notice of Postpetition Fees, Expense, and Charges" as soon as practicable, but not later than close of business on May 28, 2012. This deadline is 180 days from the effective date of the rule change.

If the loan entered bankruptcy after December 1, 2011, then by this time, all mortgage lenders should have new procedures in place whereby every loan in bankruptcy is assessed at a specific interval for post-petition charges. We have heard a 120 day timeframe recommended by some Chapter 13 trustees, as this provides the lender with a buffer period to iron out any difficulties with assessing the loan or providing necessary documentation, etc.

Also, though the B10 attachment is only required for claims against the debtor's principal residence, we recommend filing this attachment with all claims, because it is often difficult to determine whether a property is the debtor's principal residence. It is our view that providing more information at the outset is best.

Another highly effective practice is to provide counsel with all necessary information, including documentation, upon referral. As lenders are aware, the actual preparation of these forms can be time-consuming, making added delay potentially disastrous. Due to the mandatory nature of these rules and the threat of sanctions for non-compliance, we believe the best practice is for clients to compile all necessary documentation and information before referring the action out to counsel. This will alleviate bottle-necking in preparation, as well as reduce the added costs associated with dedicating resources to post-referral communications, needs, etc.

So, just what documents and information should be provided? First, for a proof of claim in any case, counsel will need copies of the original loan documents showing a properly perfected security instrument and a full and proper chain of title on the face of the note or allonge. Additionally, any post-origination loan modifications that affect the interest rate or payment amount should be provided. For those claims including prepetition fees, expenses, and charges, counsel will need copies of invoices to prove up any fee, expense, or charge related to a prior foreclosure or bankruptcy. This includes, for example, title fees, attorneys' fees, publication costs, mailing costs, etc.

For claims in the debtor's principal residence, clients will need to provide a breakdown of the amount and date of each fee, expense or charge that is being claimed. It is highly recommended that clients send an itemized list to counsel showing this information. It is often hard for counsel to glean information from lender screen shots and any misrepresented information could later be subject to objection and potential sanctions.

In conclusion, lenders seeking to modify current referral methods and case management processes in order to comply with the new Bankruptcy Rules should keep the purpose of the new rules in mind: disclosure. When in doubt, err on the side of caution and disclose.