Cite as: Keith M. Lundin, Lundin On Chapter 13, § 28.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
Understanding of Chapter 13 varies dramatically from one credit community to the next. In some jurisdictions, a high volume of Chapter 13 cases has forced creditors to recognize that Chapter 13 is different from Chapter 7, and the different rights and responsibilities of creditors in Chapter 13 cases are broadly exercised. Elsewhere, a Chapter 13 notice goes in the same round file as the no-asset Chapter 7 notices, and creditors exercise their ignorance by passing up substantial dividends. Creditors that attempt nationwide Chapter 13 practice must become familiar with hundreds of different programs and must address the daunting task of finding competent representation across many jurisdictions. The mortgage-servicing industry has shown particular incompetence in this regard.1
In some jurisdictions, booklets are available from the Chapter 13 trustee explaining creditors’ rights in Chapter 13 cases, and the Chapter 13 trustee offers periodic seminars for creditors. Explanation of Chapter 13 to a creditor should include at least the following topics:
Differences between Chapter 13 and Chapter 7
Special role of the Chapter 13 trustee
Handling the notice of filing of a Chapter 13 case
What ECF and PACER are
The automatic stay and the codebtor stay
When to refer a Chapter 13 case to counsel
The meeting of creditors
Preconfirmation payment rights
Negotiation of (favorable) treatment in the plan
The special rights of secured claim holders: valuation, interest and periodic payments
The special rights of real estate–secured claim holders
The special rights of landlords and lessors
The best-interests-of-creditors test, disposable income test and other rights of unsecured claim holders
Effects of confirmation
Importance of filing a proof of claim
Dividend checks—when they can be expected, in what amounts and how payments are applied
Monitoring the debtor’s performance after confirmation—how to know when a plan is failing
When conversion or dismissal is appropriate
How to get reports and information on a pending case
What creditors can and cannot do after discharge.
Many creditors underrealize their rights in Chapter 13 by failing to file proofs of claim and failing to effectively negotiate or litigate such things as the value of collateral and the applicable interest rates for the payment of secured claims. In some jurisdictions, failing Chapter 13 cases languish for months before any party in interest moves to convert or dismiss. On the other hand, too many creditors file proofs of claim without proper documentation or otherwise fail to satisfy the Code and Bankruptcy Rules requirements for allowance—especially with respect to assigned claims.2
Representation of a Chapter 13 creditor is possible only if counsel gets the notice of filing in advance of the meeting of creditors and at a stage of the case when negotiation is possible or the threat of an objection to confirmation is meaningful. Because of the relatively small size of claims in Chapter 13 cases, it is often not economical for creditors to commit attorneys’ fees to manage every case. The prefiling role of creditor’s counsel may be to explain Chapter 13 well enough that the client can make reasoned decisions whether to handle the case in-house or refer it to counsel. With proper supervision by counsel, the run-of-the-mill Chapter 13 case can be handled for a creditor by nonlawyers.3
The general rule is that a corporate or partnership creditor can file a proof of claim but is not permitted to appear in court in a Chapter 13 case except through counsel. As amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA),4 § 341(c) permits “a creditor holding a consumer debt or any representative of the creditor . . . to appear at and participate in the meeting of creditors in a case under chapter 7 or 13, either alone or in conjunction with an attorney for the creditor.”5 An agent for the corporation or partnership can negotiate with debtor’s counsel before and at the meeting of creditors and until court action becomes necessary. Counsel for a creditor should be aware of the Debt Relief Agency (DRA) provisions added to the Code by BAPCPA—at least to avoid straying into the complex disclosures and other duties that apply to DRAs.6
Creditors have many choices of how to loan money and how to provide goods or services on credit. The manner of extending credit can dramatically affect a creditor’s rights in the event of a Chapter 13 case. Counsel can advise creditor clients of ways to maximize their rights in Chapter 13.
For example, a creditor that structures a loan to require a cosigner will be entitled to collect the debt from the cosigner in the event the borrower files Chapter 13 and does not propose to pay the debt in full.7 The creditor with a co-signed claim may realize separate classification and more favorable treatment in a Chapter 13 plan.8 A creditor with the option to take a security interest in the debtor’s principal residence will be advantaged if the borrower files Chapter 13.9 A creditor with the choice of selling or leasing an item may wish to lease to realize the enhanced rights of a lessor in bankruptcy.10 After BAPCPA, car lenders, furniture lenders and the like need special counseling with respect to the “hanging sentence” at the end of § 1325(a) which offers enhanced rights at confirmation to motor vehicle and personal property financiers under certain circumstances.11 Mortgage lenders and servicers have mired themselves in endless litigation in Chapter 13 cases—in no small part because of poor or no consultation with bankruptcy-knowledgeable counsel before lending and during Chapter 13 cases.12
Creditors that discover unperfected security interests are sometimes best advised to go ahead and race the debtor to perfect the security interests before the debtor files Chapter 13. It is a reality of Chapter 13 practice that preferences are rarely recovered and fraudulent conveyances are rarely attacked.13 The repossession of personal property immediate to a Chapter 13 case can be advantageous to a creditor. There is controversy whether the debtor retains a property interest in repossessed property and whether the automatic stay applies when repossession is completed before the Chapter 13 filing.14 The return of repossessed property in a Chapter 13 case is typically conditioned that the debtor adequately protect the creditor by maintaining insurance and making periodic payments.15
Creditors have to know what can happen to their claims in a Chapter 13 case in order to bargain effectively with a defaulting borrower before bankruptcy. The prebankruptcy workout for an individual borrower may reflect a hypothetical Chapter 13 case. For example, the mortgage company threatened with Chapter 13 may be best advised to contract for payment of arrearages with interest over a reasonable time and maintenance of regular mortgage payments in lieu of a foreclosure.16 The undersecured creditor is especially at risk in the prefiling game of brinkmanship. Pressing for continued current payments may result in a write-down of the value of the creditor’s claim and a write-off of some or all of the deficiency in a Chapter 13 case—unless the creditor knows that it can claim the preferred status of a 910-day PMSI lender.17 The knowledgeable undersecured creditor might negotiate for lower payments by contract rather than the lower and fewer payments likely at cramdown in a Chapter 13 case.
The bottom line for creditors’ counsel is a difficult obligation to educate their clients on Chapter 13 law and procedure—a job made significantly more difficult by the enactment of BAPCPA.18
1 See § 308.2 [ Mortgage Claim Issues ] § 138.8 Mortgage Claim Issues.
2 See §§ 275.1 [ 1994 Code Amendments Changed the Rules ] § 132.1 1994 Code Amendments Changed the Rules–281.1 [ Postpetition Claims ] § 132.9 Postpetition Claims and 287.1 [ Timing, Procedure and Evidence Presumption ] § 135.1 Timing, Procedure and Evidence Presumption–290.1 [ Untimely Filed Claims in Cases Filed after October 22, 1994 ] § 135.7 Untimely Filed Claims in Cases Filed after October 22, 1994.
3 See § 24.2 [ Use of Paralegals and Representatives ] § 26.2 Use of Paralegals and Representatives.
4 Pub. L. No. 109-8, 119 Stat. 23 (2005).
5 11 U.S.C. § 341(c), discussed in §§ 24.2 [ Use of Paralegals and Representatives ] § 26.2 Use of Paralegals and Representatives and 423.1 [ Representation at Meeting of Creditors ] § 56.4 Representation at Meeting of Creditors after BAPCPA.
6 See 11 U.S.C. §§ 526–528, discussed in § 366.1 [ WARNING! You Are a Debt Relief Agency ] § 4.1 WARNING! You Are a Debt Relief Agency.
7 See § 88.1 [ Plan Does Not Pay Debt in Full ] § 67.2 Plan Does Not Pay Debt in Full.
8 See § 150.1 [ Co-signed Debts ] § 87.3 Co-signed Debts.
9 This advantage was dramatically enhanced by the Supreme Court’s decision in Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993). See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1 Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.
10 See §§ 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1 Debtor Can Assume, Assign or Reject Executory Contracts–176.1 [ Land Sales Contracts and Contracts to Make a Deed ] § 102.9 Land Sales Contracts and Contracts to Make a Deed and 495.1 [ Leases and Executory Contracts after BAPCPA ] § 102.3 Leases and Executory Contracts after BAPCPA.
11 See §§ 451.1 [ In General: Modification Without § 506 ] § 75.1 In General: Modification Without § 506–451.6 [ Procedure and Miscellaneous Hanging-Sentence Issues ] § 75.6 Procedure and Miscellaneous Hanging-Sentence Issues.
12 See § 308.2 [ Mortgage Claim Issues ] § 138.8 Mortgage Claim Issues.
13 See §§ 53.1 [ Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances ] § 50.3 Strong-Arm Powers, Statutory Liens, Preferences and Fraudulent Conveyances and 60.1 [ Avoidance and Recovery Powers ] § 53.12 Avoidance and Recovery Powers.
14 See §§ 46.2 [ Prepetition Repossession, Levy, Sale or Conveyance ] § 46.4 Prepetition Repossession, Levy, Sale or Conveyance, 52.1 [ Turnover of Property ] § 50.1 Turnover of Property and 75.1 [ Examples of Stay Violations, and Not ] § 62.1 Examples of Stay Violations, and Not.
15 See §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation, 404.1 [ Adequate Protection before Confirmation ] § 47.2 Preconfirmation Adequate Protection after BAPCPA and 426.1 [ Adequate Protection Rights before Confirmation ] § 57.3 Preconfirmation Adequate Protection Rights after BAPCPA.
16 See §§ 129.1 [ Overview: General Rules for Saving Debtor’s Home ] § 81.1 Overview: General Rules for Saving Debtor’s Home–141.1 [ Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994 ] § 84.3 Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994 for a discussion of the power to cure default and reinstate home mortgages in Chapter 13 cases.
17 See §§ 451.1 [ In General: Modification Without § 506 ] § 75.1 In General: Modification Without § 506–451.6 [ Procedure and Miscellaneous Hanging-Sentence Issues ] § 75.6 Procedure and Miscellaneous Hanging-Sentence Issues.
18 See Part 9 for detailed discussion of BAPCPA.