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Bankruptcy Chat: Judicial Conference Approves Model Plan, Rule Amendments

The Judicial Conference on March 14, 2017, approved the adoption of amendments to the Federal Rules of Bankruptcy Procedure and an official form plan to be used in all chapter 13 cases. The U.S. Supreme Court and Congress will next consider adoption of the plan and rule amendments under an expedited approval process. If approved, Official Form 113 and related rules will become effective on December 1, 2017.

Mandatory Use

The Advisory Committee on Bankruptcy Rules first considered an official form plan to be used by all debtors in all jurisdictions in 2011. The goal for the adoption of an official form plan was twofold. First, the committee hoped a uniform plan would eliminate considerable inconsistencies in chapter 13 practice and in the treatment of creditors across districts.

The committee also wanted to simplify the review of chapter 13 plans by courts, trustees, and creditors, particularly by identifying unusual or nonconforming plan provisions. The goal to simplify the review process likely was motivated by the U.S. Supreme Court’s admonishment in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 277 (2010), that bankruptcy judges should independently review plans for conformity with applicable law.

Opt-Out Proposed

Although the use of an official form plan is consistent with existing practice of using national forms for regular bankruptcy procedures, there was significant opposition to the adoption of a mandatory plan. Some critics complained that the Advisory Committee failed to demonstrate adequately the need for an official form plan and that such a plan could not address differences in practice across jurisdictions. As a compromise to the opposition, the committee proposed the adoption of new Rule 3015.1, which would allow districts to opt out of using the official form and adopt their own local plans, provided specified formatting and disclosure requirements are satisfied.

These requirements include:

– A district may adopt only a single local form plan after public notice and comment period.

– Each plan paragraph must be numbered and labeled in boldface type with a heading stating the subject matter of the paragraph.

– The plan must indicate whether it contains nonstandard provisions or if it proposes to strip or “cram down” a lien.

– Separate paragraphs must be used for the treatment of home loans, the payment of domestic support obligations, the treatment of claims that are subject to the “hanging paragraph” of Sec. 1325(a), and surrendering collateral.

Districts that do not opt out of the official form plan may make only minor changes to the form as permitted by Rule 9009. Moreover, confirmation orders in these districts may not abrogate or contradict provisions of the official form plan. Rule 9009, which limits the range of permissible changes to the official forms, does not apply to local form plans adopted under Rule 3015.1.

Plan Confirmation and Objections

Rule 3015 governs the filing and confirmation of chapter 13 plans. Objections to confirmation must be served on the debtor, the trustee, and anyone else designated by the court. Objections to confirmation are contested matters and therefore they are subject to the notice requirements of Rule 9014. However, Rule 9014 requires only that notice of objections be reasonable; neither Rule 9014 nor current Rule 3015 provides a specific notice period for objections. Rule 3015 as amended would require service of an objection to confirmation at least seven days before the confirmation hearing. Amended Rule 2002 would additionally require 28-days’ notice of the date of the confirmation hearing and at least 21-days’ notice of the time fixed for filing objections to confirmation.

Claim Allowance and Valuation

Under current practice, secured creditors generally are not required to file proofs of claim in chapter 13 cases. Under the official form plan and amendments to Rule 3002, most creditors, including secured creditors, would need to file a proof of claim within 60 days after the case is filed. The current bar date for non-government claims is 90 days from the first date set for the meeting of creditors. The shorter bar date would prevent claims from being filed after plan confirmation. A claim that is not timely filed is not allowed and the creditor may not participate in plan payments. There are exceptions to the proposed bar date. Most notably, creditors with a security interest in the debtor’s principal residence have until 70 days after the case is filed to file a claim, and supplements and attachments to claims may be filed for up to 120 days after the case is filed.

If the amount specified in a proof a claim differs from what is scheduled by the debtor, the claim would control, unless the plan provides for the valuation of a secured claim under Code Sec. 506(a). This shifts the burden to object to the treatment of a claim to the debtor. For example, an arrearage amount listed on a creditor’s proof of claim would control over the amount given in the plan unless the debtor objects. However, if a debtor’s plan proposes to bifurcate, or “cram down,” a secured claim under Sec. 506(a), a new subsection added to Rule 3015 provides that the value of the claim determined through the plan would control over either a contrary proof of claim by the creditor—without the need for a claim objection—or the claim amount scheduled by the debtor.

Lien Avoidance

The official form plan would allow lien stripping by means of a plan provision. An adversary proceeding to determine the validity, priority, or extent of a lien would not be required under amended Rule 7001, although the plan would need to be served on the affected creditor in the manner currently provided under Rule 7004 for serving an adversary proceeding challenging the extent or validity of a claim. In addition, the plan would be required to alert creditors on the first page that the plan contains a lien avoidance provision.

The debtor’s plan also may provide for the avoidance of a non-purchase-money security interest as authorized by Sec. 522(f). Currently, lien avoidance under Sec. 522(f) requires a motion.

Lien Releases and Surrendering Collateral

A new subdivision added to Rule 5009 would establish a procedure by which the debtor may request an order declaring that a lien stripped in bankruptcy has been satisfied. An order entered under the new subdivision would serve as a valid release of the lien. The rule does not appear to require that the debtor wait until case closing, the entry of discharge, or the completion of plan payments to file the motion.

Surrender of Collateral

The model plan provides for surrendering collateral and consent to terminate the automatic stay with respect to the surrendered collateral. Termination of the stay would be effective upon plan confirmation. The co-debtor stay also would terminate absent a contravening plan provision.

The proposed official form plan and related Bankruptcy Rules are available at http://www.uscourts.gov/rules-policies/pending-rules-and-forms-amendments/pending-changes-bankruptcy-forms.