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December 7, 2010

Loan Modification Guidelines in the Northern District of California

December 7, 2010
Dear Insolvency Law Committee constituency list members:

Please be advised that on December 1, 2010, Guidelines governing
(a) first lien mortgage holders who are seeking relief from stay in Chapter 7 cases in which the debtor has sought a loan modification, and (b) Chapter 11 and Chapter 13 debtors who seek consensual modification of the first mortgage loans on their principal residences went into effect in the San Francisco and San Jose divisions of the U.S. Bankruptcy Court for the Northern District of California.  You can read the new Guidelines by clicking [HERE]

Disclosure Obligations Of Secured  Creditors

Mortgage holders moving for relief must state on the cover sheet accompanying their motion (a) whether or not debtor has requested a loan modification prior to bankruptcy and/or the date any motion is filed, and (b) the status of the request.  

Adequate Protection Options After Stay Relief Motion
As adequate protection, the court may set a deadline for the debtor to file a declaration describing (1) the date of such a modification request and to whom it was sent (attaching a copy of any transmittal letter, (2) the status of the request; and (3) the amount that is 31% of the debtor(s)' monthly gross income as shown on Schedule I. 

The court may then set “an appropriate monthly payment amount, and in doing so may consider as adequate a monthly amount that is 31% of the debtor(s)' monthly gross income.”  Such an adequate protection order will normally provide that, if the modification request is denied, the adequate protection payments will revert to the amount provided in the loan documents in the next calendar month and that the hearing may be restored to the calendar on ten days notice.
Modification In Connection With A Plan
A Chapter 11 or 13 plan premised upon a modification of a first mortgage loan secured by the debtor’s principal residence requires disclosure (by declaration in a Chapter 13 case or in the disclosure statement in a Chapter 11 case) of (1) the date of any modification request, (2) the status of such request, and (3) the present (unmodified) balances and total monthly payments on all claims secured by the debtor’s principal residence.  Chapter 11 and 13 plans that propose to modify a first lien mortgage creditor's claim will not be confirmed until the modification has been approved by the first mortgage lender unless the plan provides that the secured creditor’s treatment reverts to the original contract terms if the modification request is denied.  If a loan modification request remains pending when all other plan payments have been made, the case may be closed without a discharge.
Author’s Comment:

Guideline 10 makes it possible to confirm a plan while a modification request remains under consideration by a lender, but a potential trap for the unwary debtor exists in confirming a plan premised on approval of a modification.  If the modification is denied, cash flow is not sufficient to make payments on the loan’s original terms, and the plan cannot be modified, then the debtor’s residence is likely to be lost after confirmation.  Continuing to perform the plan may no longer make sense after such a loss.  While a Chapter 13 debtor has an absolute right to dismiss under Bankruptcy Code section 1307(a), Chapter 11 debtors have no such right under Bankruptcy Code section 1112(b); a court must decide whether to convert even if dismissal is the debtor’s preference.  In re Camden Ordnance Mfg. Co. of Arkansas, Inc., 245 B.R. 794, 803 (E.D. Pa. 2000).  “. . . [T]he standard for evaluating a debtor’s motion to dismiss its own voluntary Chapter 11 is the ‘best interest of creditors and the estate,’ rather than ‘plain legal prejudice’ to the creditors.”  Id. at 804.  Absent a demonstrated ability to pay or otherwise accommodate creditor claims as a condition of dismissal, practitioners should endeavor to complete any loan modification before confirmation and ensure that the debtor is fully-advised of the risks of not doing so.

These materials were prepared by Robert G. Harris of Binder & Malter, LLP in Santa Clara

Thank you for your continued support of the Committee.

Best regards,

Insolvency Law Committee


The Insolvency Law Committee of the Business Law Section of the California State Bar provides a forum for interested bankruptcy practitioners to act for the benefit of all lawyers in the areas of legislation, education and promoting efficiency of practice.For more information about the Business Law Standing Committees, please see the standing committee's web page: http://businesslaw.calbar.ca.gov/StandingCommittees.aspx

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December 7, 2010 in Current Affairs | Permalink


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I hope similar rules are adopted by other districts as I have seen this come back to bite people numerous times.

Posted by: Chris Lane | Dec 10, 2010 8:58:46 AM

I hope at certain point of time, there should arise changes, some relief to the people who suffers from financial hardships. Thank you for sharing this information.

Posted by: Loan Modification Company | Jan 11, 2011 12:47:26 AM

It's getting nastier and nastier out here. The banks claim they never receive documents, and consequently never process. Forget Faxing, everyone should be "forced" to use email attachments containing scanned documents. The banks can never claim they didn't receive the proper documents. There is a "virtual" trail, and there's no way out for them.

Posted by: Citimortgage Loan Modification | Mar 18, 2011 4:48:29 AM

The worst thing the institutions do is claim they never received the documentation. The law should be that a "virtual" record, or email is mandated. This way there is truly a paper trail on both sides of the equation.

Posted by: Citimortgage Loan Modification | Mar 18, 2011 7:04:00 AM

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