Credit Union Legal Update – Fall 2012

    By Credit Union

    The Proof is in the Pudding – Skimming the New Bankruptcy Code Rules

    Many credit unions are pleased, or at least temporarily pleased, with their current delinquency rate. All are concerned about potential increases in delinquencies in 2013, 2014 and beyond. As rates begin to climb, perhaps delinquencies will also begin to climb.

    This Credit Union Legal Update is to let you know about some significant changes and potential pitfalls for those filing proofs of claim in the federal bankruptcy courts. Some of this might be “old” news to you, but my bankruptcy partners thought I should alert my credit union contacts. At the end of last year, there were significant changes to the Federal Rules of Bankruptcy Procedure governing proofs of claim. These changes resulted in a new standard form for filing such proofs as well as some new requirements, particularly for proofs of claim in individual bankruptcies or claims secured by mortgages and deeds of trust.

    There is no substitute for reviewing a current version of the relevant rules and carefully following the instructions on the proof of claim form. We hope this summary provides you with a helpful general overview if your credit union files its own proofs of claim. In cases involving large or complex claims, Kaufman & Canoles is always available to assist in the preparation of a proof of claim. 

    The first thing to know is that internal forms for filing proofs of claim drafted before 2012 can no longer be used. Proof of claim forms are usually provided along with notices when an individual or entity files for bankruptcy. However, many credit unions have their own internal forms that they have created over the years. Those forms will be based on the outdated pre-2012 version of the proof of claim forms. Use of these forms may result in a claim being delayed or denied.

    Next, there have been several changes requiring creditors to provide additional information. Some of these changes only apply in specific cases, i.e. cases against individuals or where the claim is secured, but others are more universal. Federal Rule of Bankruptcy Procedure 3001(c) was amended to require that where a claim or lien is based on a document, a copy of the document must be attached. If the debtor is an individual, rather than a company or other entity, interest and fees that are part of the claim must be itemized. For any security interest against an individual debtors property, a payoff amount as of the date the individual filed bankruptcy must be included. A special attachment must be provided including escrow information if the claim is secured by a lien on an individual debtors principal residence. However, please be careful about the potential inadvertent disclosure of a member’s personal information. It should all be redacted. For more information on this subject, please review my credit union newsletter (Credit Union Legal Update Fall 2009), which can be reviewed at here.

    If a creditor fails to provide the information required in the case of an individual debtor, the creditor may be prohibited from providing the information at a later date. While the claim may not be denied immediately, the inability to provide this information could easily result in denial if the debtor challenges the claim later. Worse, the creditor could be required to pay any expenses and attorneys fees generated by the debtor because of the lack of information. This is fertile ground for debtors attorneys to recoup fees and we expect to see this section used more and more as time goes on.

    Additionally, an entirely new rule, 3002.1 is exclusively concerned with requirements where a creditor holds a security interest in the principal residence of a chapter 13 debtor and the debtor provides for that claim as part of his Chapter 13 plan. Chapter 13 cases are very common and for any entity that holds mortgage claims, this rule is of great importance. It requires a series of notices to the debtor, debtors counsel, and the Chapter 13 trustee whenever changes occur to the payment amount under the mortgage. A notice is also required within 180 days of incurring any fees or expenses that the creditor claims arising from the bankruptcy case, essentially any collection expenses or attorneys fees the creditor seeks to recover under the mortgage note. The rule provides a method for the debtor to challenge these fees. Finally, the creditor is required to respond to a notice provided by the trustee when the debtor files the last payment under the plan to cure any arrearage under the mortgage, stating whether the creditor believes there is any amount unpaid. This rule, like the new provisions in Rule 3001, also provide for attorneys fees and the exclusion of evidence if the creditor does not comply.

    Hopefully, this overview of the changes in the bankruptcy rules is helpful to you in addressing proofs of claim as they arise. The claims process is increasingly rigorous and technical, especially in the case of secured claims against individuals. We are always happy to assist you if you have any questions or concerns.

    E. Andrew Keeney, a partner with Kaufman & Canoles, is the editor of the Credit Union Legal Update. Andy has been committed to the representation of credit unions for over three decades. In addition to serving as the in-house attorney for the State Department Federal Credit Union and the Pentagon Federal Credit Union, he has represented many credit unions, leagues and associations, as well as the NCUA.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2022.