New Bankruptcy Rule 3002-1 Amendments and Future Considerations: Seeking More Clarity in Post-Petition Chapter 13 Obligations

The Judicial Conference Advisory Committee on Bankruptcy Rules recently unanimously agreed to proposed amendments to Bankruptcy Rule 3002-1, which requires a secured creditor of residential property to notify debtors of changes to post-petition payments that may become due over the course of a chapter 13 bankruptcy. The rule originally went into effect in December of 2011 to “aid in the implementation of § 1322(b)(5), which permits a chapter 13 debtor to cure a default and maintain payments on a home mortgage over the course of the debtor’s plan.”[1] The rule in its current form requires the creditor to notify a debtor of any change in payment amount, including interest rate or escrow adjustments, no later than 21 days before a new payment amount is due.[2] Within 180 days, the creditor must file and serve on the debtor, debtor's counsel, and the trustee a notice itemizing all fees, expenses or charges that (1) were incurred in connection with the claim after the bankruptcy case was filed, and (2) the holder asserts are recoverable against the debtor or against the debtor’s principal residence.[3] Subsections (f), (g) and (h) of Rule 3002.1 provide for a mechanism that gives the trustee and the creditor an opportunity to clarify whether the debtor has made a final payoff under the plan upon exiting chapter 13.

The premise of the rule is simple and intended to prevent surprises in the administration of a chapter 13. A creditor is bound by its post-petition payoff statements and is equitably estopped from seeking fees or other charges in excess of the stated amount.[4] A debtor is also well informed and equipped to make payments as they change and come due.

The consequences of failing to comply with this rule are not insignificant. The holder of a secured claim who fails to provide proper notice under Rule 3002-1 may be either barred from presenting future payment changes or required to pay the debtor’s reasonable expenses and attorney fees caused by the creditor’s inaction.[5]

Two years after the rule was implemented, those affected by the rule realized it needed to be tweaked. Courts have come to conflicting interpretations of the rule despite the rule’s best intentions to provide greater transparency to chapter 13 participants. For example, some courts have noted that the language referring to § 1322 means that the rule only applies if a debtor is planning to cure a pre-petition arrearage through a chapter 13 plan.[6] Other courts have determined that Rule 3002-1 applies whether the debtor is paying pre-petition arrears or maintaining monthly payments, and that all debtors have an equal need to know of post-petition changes in the monthly payment and charges imposed by lenders so that they can be fully current on their mortgages when they complete their plans.[7]

Courts have also disagreed as to whether the rule’s reference to § 1322(b)(5) implies that debtors who make payments outside of a plan are not entitled to Rule 3002.1 protection. It makes sense that if a debtor decides to “go it alone,” or if the automatic stay is lifted entitling the creditor to foreclose, the creditor should no longer be required to provide payment change notices because the likelihood of a debtor continuing to pay on the debt is slim. Under these circumstances, a creditor that does not provide payment change notices should not waive its rights regarding later contractual payment adjustments.[8]

In In re Holman,[9] by contrast, the court found that a creditor’s obligations to continue to provide notices under Rule 3002-1 should continue until the debtor’s right to cure ends, which is when he no longer holds title to the property. In this case, the court found that the debtor still needed information after the court granted stay relief so that the debtor could continue to defend the foreclosure action, enter into a loan modification, propose further plan amendments, or sell the residence through a private sale.

The Advisory Committee grappled with the cost vs. benefit of continued notices after the automatic stay is lifted. On the one hand, the date that the stay is lifted is easy to determine and would create a uniform practice across the country. On the other hand, the date that the title transfers provides debtors more flexibility in continuing to resolve their payment issues until the last moment of ownership, but is subject to varying state law.

The Advisory Committee settled on the following proposed amendment to address these issues:

This rule applies in a chapter 13 case to claims (1) that are secured by a security interest in the debtor’s principal residence, and (2) for which the plan provides that either the trustee or the debtor will make contractual installment payments. Unless the court orders otherwise, the notice requirements of this rule cease to apply when an order terminating or annulling the automatic stay becomes effective with respect to the residence that secures the claim.

The amendments to the rule, not set to take effect until late 2016, clarify the rule’s notice requirements by eliminating any reference to § 1322(b)(5). The notice provision applies whether or not the debtor is making payments outside a plan, and regardless of whether there is a pre-petition default.

The new rule also clarifies that unless a court enters an order to the contrary, the proposed rule would apply at the point at which an order terminating or annulling the automatic stay becomes effective, rather than when title to the residence transfers. This provision leaves room for the court to modify the rule in unique circumstances, but builds certainty into the requirement that is not dependent on varying state laws.

The new rule makes both the debtor’s and creditor’s obligations clearer in some respects, but does not alleviate the administrative burden on creditors to notify debtors of frequent payment changes or else lose entitlement to fees. The rule is still taxing to even the most knowledgeable creditors dealing with hoards of residential mortgagors in bankruptcy. Another challenge comes in detailing the ever-changing terms resulting from a resetting variable interest rate or an increase or decrease in taxes or insurance.[10] The Advisory Committee has proposed a change to section (b) to allow a court to modify the noticing requirement for claims arising from home equity lines of credit with constantly changing balances.

• The Advisory Committee put in the “dugout” for future consideration the following other issues relating to Rule 3002-1:
• Should a procedure for objecting to a payment change be added to the rule?
• Should the rule provide an affirmative procedure for seeking a declaration at the end of a case that the mortgage is current?
• Should section (c) be clarified regarding whether there is a need to report charges that the court has already approved?
• Should the claims docket continue to be used for filing notices of fees, expenses and charges?
• How should home equity line-of-credit changes be dealt with?

One thing seems certain: We can look for more changes to Rule 3002-1 to come.