The Bankruptcy Process

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Because a Chapter 13 bankruptcy case allows a mortgagor to "decelerate" his mortgage or condominium assessments and cure his arrears over time, commencement of foreclosure proceedings often prompts the filing of a bankruptcy case. In my experience, approximately 25% of the mortgage or condominium foreclosures started prompt the filing of a bankruptcy case. In fact, there is a contingent of bankruptcy attorneys, especially in the Detroit Metropolitan area, who actually read the foreclosure notices in the legal newspapers and send letters to defaulting homeowners/co-owners advising them of the availability of bankruptcy as a financial tool to save their house or car.

Commencement of a Case

Upon notice that a mortgagor has filed bankruptcy, the creditor should flag its computers and notify its default processor or treasurer or management agent not to contact the debtor about the default. If a different law firm is handling the foreclosure, it should also be notified of the filing.

Services provided by the Attorney

Services commonly provided include:

• preparation and filing of proofs of claim
• defense of objections to proofs of claim
• monitoring of confirmation of Chapter 13 and 11 Plans
• objections to confirmation of plans when warranted
• motions for relief from the automatic stay. Grounds may include:
  • default in payment
  • failure to provide insurance
  • failure to pay taxes post-petition
  • waste (failure to maintain premises)
• motions for pre-confirmation adequate protection payments
• motions to abandon property of the estate
• reaffirmation agreements

Referral to the Bankruptcy Attorney

The bankruptcy attorney requires certain basic information about the debtor, the client, and the security, regardless of the type of legal services requested. For instance, the attorney will always need:

1. the client's name (if different from the Servicer),
2. the debtor(s) name(s),
3. the property address,
4. the debtor(s) mailing address (if different),
5. the loan number,
6. the "due for" date of the loan,
7. the current monthly payment
8. the date of any previous payment changes and the amounts of the payments if a part of the delinquency,
9. the principal balance,
10. the interest rate,
11. any other charges (late fees, inspection fees, etc.) which have been added to the account, and
12. the amount of any advances for taxes and/or insurance.
13. a copy of the mortgage and note, or the condominium lien, or the construction lien, or other encumbrance against the property
14. a copy of any assignments of the encumbrance

Most mortgage companies already have a screen or report on their computer set up to provide this information to the attorney; for condominium associations, a proposed form to fill this information in by hand is available in pdf, rich text and Word® formats.

Time Frames

The commencement of a case starts the running of several clocks. The time before those clocks runs down differs between the Southern Division and Northern Divisions of the Eastern District (roughly the eastern half of the Lower Peninsula of Michigan) and the Western District (roughly the western half of the Lower Peninsula and all of the Upper Peninsula). Time frames are shown below.

Event Detroit	Rest of State
Date of filing Day 1	Day 1
Automatic stay goes into effect Day 1	Day 1
Mailing of Notice of Commencement Day 3-5	Day 3-5
Meeting of Creditors Day 30-35	Day 30-35
Objection to Confirmation 21 days from Meeting of Creditors	5 days before confirmation hearing
Confirmation Hearing (Chapter 13) 75-90 days from filing	6 months from filing
Discharge of Debtor Day 130-140	Day 130-140
Last Day to file Proof of Claim Day 180	Day 180

Motions for Relief from the Automatic Stay

The procedure for motions for relief from the automatic stay in the Bankruptcy Courts is similar for the Eastern and Western Districts. The creditor files a motion and serves it on the debtor, the debtor's attorney, the trustee, and any other parties claiming an interest in the property. If no response or objection to the motion is filed within 15 days (25 days in the Western District), the creditor can submit a proposed order and certificate of no response, and the order will usually be entered without a hearing.

If a response is filed, the court will set the matter for an initial hearing to determine if there is a disputed question of fact. If not, the motion will decided at the initial hearing. If so, the motion will be adjourned for an evidentiary hearing.

Note: in all cases, local rules require a RECORDED copy of the mortgage to be attached to the motion. In a chapter 7 case, the mortgage company will need to provide an appraisal or a written broker's price opinion indicating that there is no equity in the property.

Proofs of Claim

The proof of claim establishes the validity and secured status of the mortgage company and its right to payment. Filing a proof of claim is especially important in a Chapter 13 case so that the trustee knows both the amount of the arrears and the current monthly mortgage payment. The proof of claim should have two components: the payoff amount and the reinstatement amount. A separate schedule for each should be attached to the proof of claim, as follows:

Payoff (mortgages, construction liens, etc.):

Principal BalanceInterest accrued to the date of filingAdvances for taxes and/or insurance (deficit in the escrow account)Late charges accrued to the date of filing.

Costs and attorney fees as provided for by the obligation (note, contract)

Any other charges authorized by the obligation.

Reinstatement (mortgages, construction liens, condominium fees, etc.):

Accrued and outstanding payments as of the date of filingAccrued late charges as of the date of filingCosts and attorney fees as provided for by the obligation

Any other charges authorized by the obligation.

The amount and due date of the current monthly payment

Note: again, local rules require a RECORDED copy of the mortgage or lien to be attached to the proof of claim as evidence of perfection.

Confirmation (Chapter 13 Cases)

In a Chapter 13 case, the debtor files a plan detailing how he intends to treat the debts he owed as of the date of filing. If the plan is acceptable to creditors and/or approved by the court, the debtor makes payments to the trustee, who disburses the funds to creditors in accordance with the plan.

Generally, the debtor must either reinstate or pay in full any lien secured only by his principal residence. Reinstatement occurs by a stream of payments, commencing on confirmation and continuing for 3 to 5 years. If the debtor is current on the mortgage as of the date of filing, the debtor may provide for his direct payment of the mortgage and not through the trustee's office. If the debtor is in default at all on the mortgage, both the reinstatement of the arrears and the current monthly payment must be made through the trustee's office. Note that no payments are disbursed to creditors until confirmation, which takes place approximately 90 days (six months in the Northern Division of the Eastern District and the Western District) from the date of filing.