New bankruptcy rules require more from creditors

Listen to this article

A year into the economic crisis, the U.S. Bankruptcy Court in the Eastern District of Wisconsin is considering modifications to its local rules that would require creditors with secured claims to provide more transparency in Chapter 13 cases.

One of the proposed changes would require creditors to “clearly specify the calculation of their claim” by including details like delinquent periodic contractual payments or principal and interest.

The changes are in response to the recession and accompanying mortgage meltdown, which have propelled many homeowners into bankruptcy.

As lenders have tried to recoup their losses, bankruptcy cases have been plagued by record-keeping problems created by mortgages being sliced up and sold off in pieces to far-away investors.

According to Chief Judge Margaret Dee McGarity, the changes will give debtors a clearer indication of what they owe and to whom.

“The trading of claims has become, shall we say, a brisk market,” she said. “And that can be very confusing to people who are requested to pay mortgage holders, particularly when they get a notice which is typically in small print.”

The proposed Wisconsin rule changes are scheduled for a public hearing on December 15.

The Massachusetts bankruptcy courts implemented similar rule changes at the start of the month.

Practitioners there say the changes, in effect, shift the burden in bankruptcy cases away from debtors and onto creditors.

“What the local rules are requiring creditors’ attorneys to do is to have a conversation before filing the motion and have additional information before [they] file,” said Amy L. Lipman-White of Stanton & Davis, a Marshfield, Mass. firm.

“Is it more onerous at the beginning? Yes. But all of these things are pretty much required; we need this information anyway.”

McGarity agreed that the changes will create more burdens for creditor’s attorneys, but in her opinion, the court was left with little choice.

She said attorneys for larger mortgage servicers and regulatory agencies are less likely to negotiate than in the past, and that has created a burden on the courts.

“I’ve busted attorneys for not working things out ahead of time, but it’s not what clients want,” she said. “They want a court order.”

By requiring lenders to produce their records as soon as they enter a case, the new rules in Massachusetts seek to avoid such problems, said Mark W. Powers of Worces-ter’s Bowditch & Dewey.

“It requires lenders’ counsel to include a lot of the information that debtors typically seek and that is sometimes missing,” he said, such as who owns the mortgage and the number of payments collected.

More transparency

The requirement to produce such documentation is an outgrowth of past concerns, attorneys say.

“The real genesis for the changes in the local rules is [that] mortgage lenders have engaged in practices which have been less than transparent,” said Nina M. Parker, a Winchester, Mass. attorney who co-chairs the Boston Bar Association’s Bankruptcy Law Section.

Wisconsin Chapter 13 trustee Thomas J. King said cases where there is a trail of debt transfers from one creditor to another are increasingly problematic.

“If XYZ credit card company is sold to one of the entities that buys up debt, the debtor has no idea who those guys are,” King said. “The debtor then gets proof of claim from the other entity and says, ‘I don’t have a claim with them.’”

King also said there have been instances where two different creditors have made claims in the same mortgage.

The proposed changes in Wisconsin would require a “Secured Proof of Claim” be filed in a Chapter 12 or 13 case.

In Massachusetts, lenders attempting to collect from Chapter 13 debtors must “attach a copy of the original note and mortgage or security agreement to the proof of claim,” and provide documentation “sufficient to trace the chain of ownership of the mortgage or security agreement and to establish its standing.”

Burdensome?

Although Parker agreed that debtors and their counsel will reap an immediate benefit from the new provisions, she disagreed that they create a “burden” for creditors.

“The local rules are designed to enable the system to work smoothly, and it will be a savings for the debtor, the creditor and the court,” Parker asserted. “I find it troubling that either a debtor or a creditor would find it burdensome when it’s designed to make the system work efficiently for both.”

But for Lipman-White, there is no getting around the fact that the new rules mean more work for her.

“Am I thrilled about the prospect of having to [make] my clients do a lot of work upfront on a debtor who hasn’t made any payments in a year? Not so much,” she said. “We’re going to be doing a lot more work before the initial filing.”

But ultimately, McGarity said the rules changes will benefit the system, because the debtor will have more information upfront.

“This is going to help debtors’ attorneys decide either, ‘okay, we can fight this, or we should make a deal.’”