Stop Bankruptcy Judges From Harming Homeowners
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The Northern District of California Bankruptcy Court Is on the verge of implementing a new Chapter 13 Plan that will harm debtors trying to save their homes through Chapter 13.
A Conduit Plan Imposes Additional Costs on Debtors Benefiting No One But Banks
By requiring that all post-petition mortgage payments be administered by Chapter 13 trustees, a conduit plan will impose enormous additional costs on debtors. In San Jose, the Chapter 13 Trustee’s current administrative claim is the maximum ten percent. On a modest $2,500 monthly mortgage payment, the proposed conduit plan will saddle the debtor with an additional $250 per month or a whopping $15,000 over the life of the plan.
Mortgage lenders and their servicers already perform the function of monitoring, accounting for, and policing their borrowers’ monthly mortgage payments. The administrative costs of servicing mortgages are already baked in to banks’ costs of doing business. Borrowers are already paying the banks for this administrative function as these costs are passed on to borrowers in the form of interest and fees. Requiring debtors in Chapter 13 trying to cure a prepetition mortgage default to additionally subsidize banks’ mortgage lending business will result in nothing short of a tremendous transfer of wealth from debtors to banks.
The gap between the richest and everyone else has been widening for decades. The corrosive effect of a shrinking middle class on our body politic is not in doubt. Against this backdrop, it is baffling why the Bankruptcy Court would do anything to undercut homeownership by shifting any additional economic burden onto homeowners for the benefit of the banks. Homeownership has traditionally been a hallmark of the middle class. Chapter 13 has traditionally offered a vehicle to many to cure a prepetition default successfully. Imposing a conduit plan will inevitably put this form of bankruptcy relief out of reach for a large swath of debtors because adding a ten percent surcharge on the Debtor’s plan payments will be enough to deny Chapter 13 relief to a substantial number of debtors, causing them to lose their homes.
While I haven’t polled Chapter 13 Trustees, I doubt very much that many of them are keen or are equipped to essentially become mortgage servicers. That is the mortgage lenders’ job, and the costs of these operations are properly understood to be part of the lenders’ business activity. Shifting the cost of the mortgage lenders’ business onto the backs of debtors, again, amounts to a windfall for large banks that are already quite profitable.
Rigid Payment Deadlines Set Debtors Up to Fail
The proposed provision of the conduit plan that debtors curing mortgage arrears had better make their new inflated payment to the Chapter 13 Trustee by the 20th day of the month or else be in default—not just of their plan, but also with their mortgage lender sets up debtors for failure. I have represented dozens of Chapter 13 debtors who have successfully cured mortgage arrears through their plans and ultimately obtained a discharge of other debts. Many of them experienced hiccoughs along the way. Sixty months is a long time in anyone’s life. Cars need repairs. People experience layoffs and get sick or injured. People sometimes need a root canal (who even has dental insurance? And if they do, how much does it cover, 30%?). In some divisions, there has traditionally been some much appreciated leeway given by the Trustee to allow debtors to informally cure plan payments. Such a flexible approach to the administration of Chapter 13 cases has helped thousands over the years emerge from Chapter 13 and to save their home.
Imposing additional rigidity on debtors’ plan payments does not further any policy end other than to favor mortgage lenders—and perhaps lessen the burden on the Court by reducing the number of motions filed for relief from stay.
In effect, the Court, by imposing this rigidity on debtors would be policing mortgage payments for mortgage lenders, thereby again relieving the banks from part of their cost of doing business. The Court from time to time has expressed its umbrage that a debtor’s delinquency in making a post-petition mortgage payment directly to a lender constitutes a material breach of the Chapter 13 plan “contract.” I get it. But the medicine proposed is significantly more harmful than the disease.
The Conduit Plan Supplants Lenders’ Business Judgment for the Court’s
Consider, for example, that during the height of the financial crisis, 2008-2013 or so, we all recall the familiar scenario wherein the mortgage lender did nothing to seek relief from the Stay for sometimes lengthy periods after a debtor became delinquent on post-petition mortgage payments. That was the bank’s prerogative. We should assume that they were making a calculated business decision in choosing to delay seeking relief from stay and foreclosing on the property. They simply didn’t want that property just yet.
The “Business Judgment Rule” represents longstanding judicial doctrine that courts should not second-guess industry in precisely this sort of scenario. The banks can look after themselves just fine. For the Bankruptcy Court to impose a conduit plan that builds in an unforgiving, nay punishing, automatic remedy for the benefit of mortgage lenders when a debtor misses or makes a smaller plan payment we have to wonder what end is served by the Bankruptcy Court inserting its own business judgment for that of the mortgage lending industry.
Moreover, there have always been those cases in which a debtor who entered a Chapter 13 plan in good faith in an attempt to cure pre-petition mortgage arrears, but at some point during her lengthy sixty-month plan suffered some unforeseen financial setback and became delinquent on her direct mortgage payments. Yes, under the “contract” theory, such a debtor has perhaps technically breached her Chapter 13 plan (though she may be current in her plan payments to the Trustee). The harshness of the conduit plan entirely ignores that such a debtor, if allowed to remain in her Chapter 13 plan (while, yes, granting relief from stay) would often successfully complete the plan and obtain a much needed discharge of other, substantial debt.
This debtor would likely have her case dismissed under the proposed Conduit Plan for having failed to make all plan payments, thereby shutting her out of obtaining needed relief from her other debts.
The proposed conduit provisions of the new model plan serve no equitable goal. The Bankruptcy Court is a court of equity. The proposed conduit provisions are demonstrably inequitable to debtors struggling to cure mortgage defaults through Chapter 13 plans. The conduit provisions would represent a windfall to banks and, perhaps, lighten judges’ relief from stay calendars. These are hardly solid policy goals when the consequences will be to saddle debtor homeowners with painful added administrative costs, onerous new deadlines, and rigid triggers for default—all of which will set them up to fail.
This is bad policy that will harm working class debtors trying to save their homes through Chapter 13 bankruptcy. Tell the Court this is WRONG before October 3, 2017:
From the Bankruptcy Court's Website:
"PLEASE TAKE NOTICE that the Court is requesting comments on the new Chapter 13 Plan (to be effective on 12/1/2017). A pdf of the Chapter 13 Plan is below. Comments regarding the new Chapter 13 Plan may be emailed to the bench-bar liaison representatives Sarah Little firstname.lastname@example.org (link sends e-mail) and W. Kirk Moore email@example.com (link sends e-mail) by October 3, 2017. Subject line of the email should be: Chapter 13 Plan Comments. The bench-bar liaison representatives will prepare a summary of comments for the judges’ review. In addition, the actual comments will be forwarded to the judges."
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