Tuesday, January 13, 2009

Crucial But Less Publicized Terms of the 2009 Chapter 13 Mortgage Cramdown Bill

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

This Bankruptcy Bulletin presents the provisions of Senate Bill 61, the Helping Families Save Their Homes in Bankruptcy Act of 2009, BEYOND the core cramdown language covered in yesterday's Bulletin. These both follow up on last Thursday's dramatic announcement of Citigroup's new support for this Chapter 13 mortgage cramdown bill, which itself was reported on in my Bulletin of last Friday. This bill would take effect on the date of enactment, applicable to bankruptcy cases filed on or after that date.

(Senate Bill. 61, and its companion bill in the House, H.R. 200, were introduced on the floor of the Senate and House a week ago today, on 1/06/09, but as of yesterday evening (1/12/09) the text of of the bills had not been received from the Government Printing Office by the Library of Congress, and no summary of the bills had yet been prepared. However the text of S. 61 was printed in the Congressional Record upon its introduction and so is accessible there.)

Major Increase in Jurisdictional Debt Limits in Chapter 13 Cases with Debts on Principal Residences
Senate Bill 61's amendment of Section 109(e) would significantly broaden Chapter 13 availability to debtors with relatively high debt (such as business and former business owners), whose "current value of [their principal] residence is less than the secured debt limit." That secured debt limit is currently $1,010,650. So, as long as a debtor's principal residence is worth less than that, the secured and unsecured debts "secured by" that residence are EXCLUDED from the "noncontingent, liquidated" secured and unsecured debt limitations (currently $1,010,650 for secured debt and $336,900 for unsecured). Even if PRE-PETITION that principal residence was lost by foreclosure or by surrendered to the creditor, any debts that remain would also be excluded from the debt limitations, again as long as the current value of that former principal residence is less than the secured debt limit. This provision would mitigate against the more and more common tendency of debtors being forced into Chapter 11 largely by the value of their residences. And because this residential mortgage cramdown option is NOT being extended to Chapter 11, this expansion of the jurisdictional limits would be critical for many potential debtors.

Pre-Petition Credit Counseling Not Required in Chapter 13's With Pending Foreclosure on Principal Residence
The bill would exclude from the Section 109(h)(1) BAPCPA's pre-petition credit counseling requirement any Chapter 13 debtor "who submits to the court a certification that the debtor has received notice that the of a claim secured by the debtor’s principal residence may commence a foreclosure on the debtor’s principal residence."

Consumer Protection Laws, Particularly Truth in Lending
The bill, as in last year's version, contains an addition to Section 502(b), which is a list of types of creditor claims which are either not allowed or else are allowed only to some designated extent. As introduced last week before the new agreement with Citigroup, the bill would allow a creditor's claim "except to the extent that---
(10) the claim is subject to any remedy for damages or rescission due to failure to comply with any applicable requirement under the Truth in Lending Act, or any other provision of applicable State or Federal consumer protection law that was in force when the noncompliance took place, notwithstanding the prior entry of a foreclosure judgment.
This provision was in effect agreed to be amended in the agreement with Citigroup. This agreement has to my knowledge not yet been incorporated into any publicly available amendment to the bill introduced last week. The only readily available source about that agreement is the letter from Citigroup's CEO to Congressional leaders of last Thursday announcing conditional support for the bill. It stated: "[P]rovisions in the bill allowing a bankruptcy judge to void a mortgage entirely for violation of consumer protection laws will be limited solely to those violations of the Truth in Lending Act (TILA) that give rise to right of resission under TILA."
Media sources have interpreted this condition to mean, for example in a Wall Street Journal article:
a mortgage debt could be forgiven entirely only if the lender was found to have committed a major violation of the Truth in Lending Act. Under the bill's original language, the entire mortgage debt could be wiped away based on a violation of any number of state and federal consumer lending laws.
Post-Petition Fees of Mortgage Creditors
A section of the bill titled "Combating Excessive Fees," amends Section 1322(c) of the Bankruptcy Code--which refers to the contents of Chapter 13 plans and their treatment of claims secured by debtors' principal residences--by providing rules for adding a post-petition "fee, cost or charge" by "the holder of the claim for such a debt." This section is as extensive as any in the bill. It provides for WAIVER by the creditor of ANY post-petition fees that do not comply with the new noticing procedure, such waiver enforced explicitly through the automatic stay of Section 362(a) during the case and through the discharge injunction of Section 524(a)(2) after the discharge. Such waiver is "for all purposes," presumably meaning not just for purposes of the Chapter 13 case.

The creditor is required to file with the bankruptcy court notice of any additional "fee, cost, or charge" within one year after it is incurred or "60 days before the closing of the case," whichever is earlier, and is required to do so "annually or, in order to permit filing consistent with clause (ii) [regarding filing 60 days before case closing], at such more frequent periodicity as the court determines necessary."
Those fees must be 1) "lawful under applicable nonbankruptcy law," 2) reasonable, and 3) "provided for in the applicable security agreement," and 4) "secured by property the value of which is greater than the amount of such claim, including such fee, cost, or charge."

Plan Confirmation
The bill adds the following two additional subsections to Section 1325(a), which is the list of the conditions upon which "the court shall confirm a plan":
(10) notwithstanding subclause (I) of paragraph (5)(B)(i) [about holders of secured claims retaining their liens until the payment of the debt or the discharge, whichever is EARLIER], the plan provides that the holder of a claim whose rights are modified pursuant to section 1322(b)(11) retain the lien until the LATER of—
(A) the payment of such holder’s allowed secured claim; or
(B) discharge under section 1328; and
(11) the plan modifies a claim in accordance with section 1322(b)(11), and the court finds that such modification is in good faith. [Capitalization added.]
This new subsection (10) provides for the holder of a claim secured by debtor's primary residence to retain their lien the later instead of the earlier of the two events: the secured debt payoff and the discharge. I do not understand why a mortgage whose secured portion is paid off during the course of a Chapter 13 case gets to keep their lien until discharge, when any other secured creditor loses their lien upon payoff it occurs before discharge.

And the "good faith" phrase in subsection (11) seems somewhat redundant since Section 1325(a)(e) already requires that a "plan has been proposed in good faith. . . ." Presumably the point is to emphasize that the modification itself must be in good faith.

Immediate Effective Date, Applicability to Ongoing Chapter 13's

As stated above, this bill would take effect on the date of enactment. Given that Congressional leaders are signaling that they intend to add this bill to the major economic stimulus package, which the new Obama Administration very much wants to enact by mid-February, debtors' attorneys particularly need to be counseling virtually every client who owns a home NOW about this potential new law, and specifically needs to be considering the potential huge benefits of delaying filing until after its enactment.
If this bill is not made part of the stimulus package--and it is not at all assured to be--its passage, especially in its present form, is less likely, and would not likely be accomplished as quickly.

The bill states that "[t]he amendments made by this Act shall apply with respect to cases commenced under title 11 of the United States Code before, on, or after the date of the enactment of this Act." Unless changed, the "before" in that provision appears to allow post-petition and post-confirmation plan modifications in cases pending at the time of enactment.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys