Bankruptcy Referral Package
The referral package will vary based upon the Bankruptcy Code chapter under which the case was filed and action that is sought:
Chapter 7
Motions for Relief from Stay
In a Chapter 7 or “straight bankruptcy” case, typically the mortgage lender’s objective is to obtain relief from the stay in order to return to the collection or foreclosure process. Presuming that situation, the referral package contains the following documents and information:
- Copy of the recoded mortgage
- Copy of the note
- Loan status screens and default information (including the default date, the amount of the monthly mortgage payment and the amount of the unpaid principal balance due)
- The Debtor / Mortgagor’s social security number
- Bankruptcy case number
Chapter 13
Proofs of Claim / Plan Reviews
The typical Chapter 13 case includes a plan which calls for the Debtor / Mortgagor to cure pre-petition mortgage arrearages through the office of the Chapter 13 Trustee while simultaneously maintaining post-petition mortgage payments. With respect to the Chapter 13 plan, it is imperative that the proposed plan and the Debtor’s schedules be reviewed to ensure that they comply with applicable law and that the proposed plan is feasible. The failure to address those issues in a timely manner can cost a lender tens of thousands of dollars in a given case. As a part of that process, it is essential that a proof of claim for pre-petition mortgage arrearages be filed as soon as those figures (including any pre-Chapter 13 filing foreclosure attorneys fees and costs) become known. Because the preparation of proofs of claim has become a very litigious area, it is recommended that the claims preparation process be handled by counsel as part of an overall review of a Debtor’s Chapter 13 plan and schedules. In addition to the documents and the information listed above for the Chapter 7 referral package, the Chapter 13 proof of claim / plan review referral package contains:
- A breakdown of all pre-petition advances, escrow shortages, fees and costs
- Itemization of any anticipated changes in the amount of the monthly mortgage payments with a breakdown explaining each such change
Motion for Relief from Stay
If a Debtor fails to make post-petition mortgage payments or (if the loan is not an escrowing loan) if the Debtor fails to maintain post-petition real estate tax or insurance premium payments, it is recommended that the client refer the matter for a motion for relief from the stay. Such a referral package contains all of the items previously mentioned as well as
- A breakdown of the post-petition mortgage / tax / insurance default.
Chapter 11
As in a Chapter 13 case, a Chapter 11 case includes the filing of a plan of reorganization. Unlike the typical Chapter 13 case, however, Chapter 11 plans vary greatly. Some provide for the liquidation of assets, while others call for loans to be re-instated or even re-structured. Because of the great variety among Chapter 11 cases (and because Chapter 11 cases are far less common in consumer and residential creditor practice than are Chapter 7 and Chapter 13 cases) it is recommended that you consult your bankruptcy counsel on a case-by-case basis when dealing with a Chapter 11 case.
The Bankruptcy Process
Generally, the filing of a Petition under Chapter 7, 11, or 13 of the Bankruptcy Code creates an automatic stay which prevent the institution or the continuation of legal or collection activities against a Debtor or against his or her assets. Typically, the stay in a Chapter 11 or a Chapter13 case even protects co-obligors who did not participate in the filing of the case. Notwithstanding those general rules, the Bankruptcy Code contains a number of provisions which were designed to deter serial and repetitious bankruptcy filing. Under certain circumstances, a repeat filer will not receive a stay upon the filing of a Chapter 13 case. Those circumstances are set forth in the Bankruptcy Code. For that reason, it is recommended that you consult your bankruptcy counsel to determine whether or not a stay has arisen when you learn of a bankruptcy filing which you believe might affect your loan. The discussion below presumes that a stay did, in fact, go into effect upon the filing of the Petition with the Clerk of the Bankruptcy Court.
Chapter 7
In a Chapter 7 case, a Debtor is allowed to retain certain unencumbered items by exercising his or her statutorily created exemptions. A few weeks after the case is filed, a court-appointed Trustee will conduct a Creditor’s Meeting. At that time, the Debtor will be questioned about his or her assets and liabilities as well as about the items that were contained in the Petition and schedules which he or she filed with the Clerk of the Court. After so examining a Debtor and the Petition and schedules, the Trustee determines whether or not a Debtor has unencumbered (or under-encumbered), non-exempt assets which may be sold. The net proceeds of such sales are used to pay priority creditors and those who hold unsecured claims. For a residential mortgage lender, the filing of a Chapter 7 Petition by a mortgagor results in an interruption of the foreclosure or collection process. In order to minimize that interruption, it is recommended that a motion for relief from stay referral be sent as soon as the lender learns of the Chapter 7 filing. Occasionally, a Trustee may determine that a Debtor has sufficient non-exempt equity in mortgaged real property to enable him to sell it to obtain net proceeds to be distributed to priority and unsecured creditors. Under that scenario, it is unlikely that the mortgage lender will be able to obtain relief from the stay. Instead, it is recommended that such a creditor refer the matter to its bankruptcy counsel to prepare and file a proof of claim for the payoff figure on the underlying mortgage debt. Whether or not the mortgage lender obtains relief from the stay, in the absence of demonstrable fraud, the Debtor typically receives a discharge a few months after a Chapter 7 Petition has been filed. That discharge relieves the Chapter 7 Petitioner (Debtor) of any personal liability for payment of the underlying mortgage debt or post-foreclosure deficiency. Upon the entry of an order of discharge and the filing of a No Asset Report by a Chapter 7 Trustee (or upon the closing of the case, in the absence of either of those 2 items) the stay no longer applies to creditors, subject to the extinguishment of personal liability upon the entry of an order of discharge.
Chapter 13
As was briefly discussed in the section which addressed referral packages, a Chapter 13 case typically calls for a Debtor to retain his or her assets by funding a court-ordered re-payment plan which is administered through the office of a Chapter 13 Trustee. As in a Chapter 7 case, the Chapter 13 Trustee conducts a hearing in which he or she examines the Debtors schedules, assets and liabilities. In the Chapter 13 setting, he or she also examines a Debtor’s plan. After the Chapter 13 Creditors Meeting has been held, the court conducts a confirmation hearing where it considers any written objections to a proposed plan. As set forth above, the best practice is to refer pre-confirmation matters to legal counsel who will protect a mortgage lender’s interests by examining a Debtor’s Petition, plan and schedules. Any defects or inconsistencies in those items should be brought to the court’s attention by filing written objections to confirmation of the Chapter 13 plan. The failure to file such an objection in a timely manner may cost a lender tens of thousands of dollars in inadvertently waived pre-petition mortgage arrearages. To avoid that, it is crucial that all Petitions, plans and schedules be examined by experienced counsel in a timely manner prior to the confirmation hearing. In many jurisdictions, the failure to properly raise an objection to a plan which understates the amount due a creditor will result in the waiver of the unscheduled debt. Chapter 13 plans may run up to 60 months in duration. Typically, during the life of a Chapter 13 plan, a Debtor is responsible for maintaining post-petition mortgage payments as well as for the payment of real estate taxes and insurance premiums which accrue post-petition. A Debtor’s failure to properly fund and maintain any of those post-petition items may give rise to a motion for relief from the stay. It is recommended that such referrals be made if post-petition mortgage payments become due for 2 monthly installments, if post-petition real estate taxes go unpaid, or if post-petition property insurance lapses. If a Chapter 13 Debtor properly funds his or her plan while maintaining post-petition mortgage payments, taxes and insurance premiums, the loan will become reinstated during the course of the Chapter 13 case.