Consumer Bankruptcy Journal Fall 2015 - Page 22

CHAPTER 13 DEBTORS Rule 3002(c) addressed the issue of “when” creditors must file. On the “when” issue, the Pajian court focused on Rule 3002(c)’s use of the phrase “proof of claim” and stressed that the drafters did not distinguish between claims of secured and unsecured creditors. “Claim” is a defined term16 and includes a right to payment, whether or not such right is secured or unsecured. The Seventh Circuit found that the use of both terms in Rule 3002 suggests that the drafters knew how to distinguish between all claims and unsecured claims. The court believed that the drafter’s decision not to limit Rule 3002(c)’s deadline to only unsecured creditors implies that the deadline applies to both secured and unsecured claims alike. d. Strategies Attorneys for NACBA The Seventh Circuit’s Pajian ruling provides NACBA attorneys with another strategy to protect homes from foreclosure when mortgage lender’s late-file or fail to file a proof of claim. First, NACBA attorneys could use the Pajian ruling as leverage against mortgage lenders which late-file or fail to file proofs of claim with the goal of pressing these lenders to modify the defaulted mortgage notes. Debtors could offer to increase the monthly postpetition mortgage payment provided in the plan if the lender agrees to include the mortgage arrearage into a recapitalized mortgage note. Alternatively, debtors could seek 22 CONSUMER BANKRUPTCY JOURNAL an extended maturity date, relaxed loan covenants, a reduced interest rate, or an interest rate change from variable to fixed. Second, debtors who have the ability to cure the mortgage arrearage may nevertheless desire not to cure the arrearage and utilize the available funds to pay nondischargeable debts. Consider for example a debtor with both a large mortgage arrearage and a large tax debt relating to unfiled taxes or fraudulent tax returns. The tax debts would be non-dischargeable, nonpriority, unsecured debt pursuant to §523(a)(1) and (a)(2).17 What is a debtor to do if the debtor only has enough disposable income to pay either (a) 100% of the mortgage arrearage and 10% of the nondischargeable tax debt; or (b) no mortgage arrearage and 100% of the non-dischargeable tax debt? The debtor may decide to save the home and worry later about the 90% of the non-dischargeable tax debt that survives the bankruptcy. Alternatively, the debtor may decide to solve the mortgage arrearage issue outside of bankruptcy (e.g. loan modification) and apply all available money to the nondischargeable tax debt. Third, debtors who successfully complete their chapter 13 plans without paying the mortgage arrearage may be able to file a chapter 13 petition (a “chapter 26”) after receiving the discharge if their financial circumstances have improved. The only debts included in a subsequent case’s chapter 13 Winter 2015 plan would be debts that were not discharged in the prior case plus the mortgage arrearage. Fourth, plans can be confirmed that do not pay mortgage arrearage and only provide the senior lender with post-petition mortgage payments. This strategy affords debtors an additional 60 months to get their financial “house in order.” While enjoying the automatic stay protections, debtors could restructure their financial lives to better manage debt obligations after the completion of the plan, including: (a) sell the real estate; (b) refinance the mortgage note; (c) allow the real estate to appreciate in value; (d) if commercial property, increase rental income by increasing rental rates and leasing any currently unleased commercial space; or (e) if residential p roperty, increase net income by obtaining a salary increase, change jobs, rent part of the home, or improve the profitability of an existing business. Some NACBA attorneys may object to this strategy because a debtor’s “day of reckoning” would merely be postponed since the mortgage arrearage debt would not be cured during the chapter 13 plan term, the lien would not be avoided, and the mortgage note would not be discharged18 upon plan completion. But that objection is based upon the false premise that chapter 13 debtors seek bankruptcy protection with the singular goal of fully paying all creditors and exiting bankruptcy debt-free. National Association of Consumer Bankruptcy Attorneys