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
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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