Changes in Mortgage Payments in Chapter 13 Cases

A Chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. §1322(d). During this time the law forbids creditors from starting or continuing collection efforts.

Problems can arise when a Chapter 13 debtor has their plan confirmed, only to find that their mortgage payment increases because of a variable rate mortgage. On March 24, 2009, the U.S. Bankruptcy Court for the Eastern District of Michigan amended Local Rule 3001-2 in order to “clarify the procedures for administering post-confirmation changes in mortgage payments in chapter 13 cases,” amended Local Rule 3001-2. The Rule, as amended, states that in a Chapter 13 case, “a creditor with a claim secured by a mortgage on real property shall file and serve on the debtor a statement of any proposed increase or decrease of periodic payments and file a certificate of service.” The creditor must file such a statement no less than 45 days before the proposed effective date of the adjustment of the payment amount. The Rule requires that the statement “fully disclose the calculations on which the adjustment is based.” Once such a statement is filed, the debtor (the individual seeking Chapter 13 protection) then has 21 days to object. If an objection is filed, the court will schedule a hearing with notice to the debtor, the creditor and the trustee. Within 14 days after the Court resolves any objections (or within 14 days after the deadline for filing objections passes, whichever is later), the trustee shall file a notice stating whether the plan will still be adequately funded with the current plan payment amount and if not, stating the necessary increase in plan payments. If necessary, the debtor may be required to file a plan modification under Local Rule 3015-2(b) to assure adequate funding of the plan. The Rule, as amended, also creates certain exceptions for creditors whose mortgage payments are “subject to change more frequently than once every six months.”

If you are considering bankruptcy, it is important to consult with an attorney who is familiar with your jurisdiction’s local rules. Although the Federal Rules of Bankruptcy Procedure are the same throughout the United States, each federal bankruptcy court is also authorized to adopt local rules which clarify or fill voids left by the Federal Rules. The failure to follow local rules can have damaging effects on a bankruptcy proceeding.

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