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Updates and Insight from the Chapter 13 Trustee s Office

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How to Effectively Network, Part 3: From Networking to Referrals

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October 22, 2015, 5:30-7 p.m. IndyBar Education Center The finale to this three-part series is one you don’t want to miss. Once you understand the basic principles of networking, including how to work a room, how to make connections and follow up, and how to develop a rapport with new contacts, the final element is to turn those relationships into referrals. Author and speaker Robby Slaugh-ter will teach you how to take the next step to convert “people you know” into connections that bring you business.

How to Effectively Network, Part 2: Stop Wasting Time Networking

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October 8, 2015, 5:30-7 p.m. IndyBar Education Center At this program, Jamar Cobb-Dennard will cover the type of net-working that will impact your goals and career the fastest, who to and who not to develop relationships with, how to “vet” potential network-ing partners, and more!

Make the most of your networking opportunities in ways that you never have before when you attend this program. You’ll get further faster and finally see the results that you want.

Litigation Trial Skills Series: Experts (LIT1075)

October 14, 2015, noon-1 p.m. IndyBar Education Center When the trial turns to expert vs. expert, it’s important to be able to bring the best out of your expert and effectively cross-examine your op-ponent’s expert. This session will address both and will include a dis-cussion on the use of experts at trial to properly lay the foundation and admit expert opinions into evidence.

Updates and Insight from the

Chapter 13 Trustee’s Office

Presenter

John M. Hauber, Office of Chapter 13 Trustee

September 23, 2015

CMB969

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Phone: 317.636.1062 Fax: 317.636.1186

E-mail: JohnH@Hauber13.com

J

ohn

M. H

auber

Office of the Chapter 13 Trustee

151 N. Delaware Street Suite 1400

Indianapolis, IN 46204

John M. Hauber, Chapter 13 Standing Trustee

JOHN M. HAUBER was appointed as the Chapter 13 Standing Trustee for the Southern District of Indiana, Indianapolis Division on April 1, 2015. Prior to this appointment, Mr. Hauber was a partner in the Indianapolis, Indiana office of Tom Scott & Associates, P.C. His practice included business and consumer bankruptcy, debtor and creditor’s rights including financial restructuring and workouts, and all aspects of bankruptcy litigation.

Mr. Hauber received his A.B. from Wabash College in 1990 and his J.D. from Indiana University Robert H. McKinney School of Law in 1993. He worked for the Indiana Attorney General’s Consumer Protection Division from 1993 through 1997 as a Deputy Attorney General and was a member of the National Association of Consumer Advocates and the Indiana Home Defense Task Force. He worked in private practice from 1997 through 2002 emphasizing the representation of consumer bankruptcy debtors. Mr. Hauber was a staff attorney for Chapter 13 Trustee Robert A. Brothers in December 2002 before returning to consumer bankruptcy practice in August 2008.

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Indianapolis Bar Association

Bankruptcy and Commercial Law

Recent Significant Decisions

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2. conversion of a case under Section 1307 terminates the services of any trustee or examiner that is serving in the case before the conversion.

Taken as a whole, then, immediately upon conversion, the Chapter 13 trustee’s services are terminated and the one bankruptcy estate consists of the property that the debtor had on the date of the original filing. Post-petition wages are not, therefore, property of the estate. There is no estate to “wrap-up” because there is no Chapter 13 trustee and the estate still exists in the form of the pre-filing assets to the extent that they are still available.

The biggest issues that arise stem from the exception found in Section 348(f)(2) which says, “If the debtor converts a case under chapter 13 of this title to a case under another chapter under this title in bad faith, the property of the estate in the converted case shall consist of the property of the estate as of the date of conversion. Although it sounds clear enough, only the bankruptcy judge assigned to that case can make the determination of whether a case was converted in bad faith. If the Chapter 13 trustee believes that a case was converted in bad faith, the trustee lacks standing to raise that issue before the court as the trustee’s services were terminated. So what should the trustee do with the funds on hand after notice of conversion? If the trustee returns the funds to the debtor as the United States Supreme Court says we should do then the funds will likely be gone by the time the Chapter 7 trustee even knows about the

potential bad faith. If the Chapter 13 trustee sends the funds to the Chapter 7 trustee, then the trustee runs the risk of damages to the debtor (e.g. the debtor was going to use the money to purchase a vehicle to get to work and use the funds to make a deposit on an apartment, etc…). In addition Rule 1019 of the Federal Rules of Bankruptcy Procedure state that “after qualification of, or assumption of duties by the chapter 7 trustee, any debtor in possession or trustee

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3. the debtor in possession or trustee.” Whether a debtor converted in bad-faith is the sole

determination of what constitutes property of the estate. The bad faith happened at the time of conversion, but the act is only defined as bad-faith following a judge’s order at some time in the future. Therefore, a Chapter 13 standing trustee will only have knowledge that he or she violated FRBP 1019 some period of time after the fact.

Several attorneys have asked me whether a contract provision signed by the debtor allowing us to pay attorney fees from funds on hand upon conversion would allow such a payment. Unfortunately, I will not agree to that. Specifically, debtor’s counsel is a creditor that is owed money. Section 348(d) specifically states, “A claim against the estate or the debtor that arises after the order for relief but before conversion … shall be treated for all purposes as if such claim had arisen immediately before the date of filing of the petition.” In other words, debtor’s counsel is a creditor with a debt that is dischargeable in bankruptcy. I would need to look at that claim in the same manner as if I was receiving a letter from Visa or MasterCard. Attorneys who charge zero dollars up front are extending credit at 0% for services that they have already

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4. In re Edward J. Paijan, No. 14-2052 (7th Cir. May 11, 2015) - Lisle Savings Bank missed the deadline to file a proof of claim by more than three months and then filed its claim covering two debts. One claim was secured by a first mortgage on commercial real estate, and the second was an unsecured deficiency judgment. The debtor, Edward Paijan, objected to the claim as being late filed. The bank argued that Rule 3002(c) applies only to unsecured creditors and that it could file a proof of claim at any time prior to confirmation. The bankruptcy court agreed with Lisle Savings Bank, but the Seventh Circuit reversed that decision and held that even a secured creditor must file its proof of claim within the 90-day deadline imposed by Rule 3002(c). Because there was no applicable exception in this case, the secured creditor would not be allowed to participate in the Chapter 13 bankruptcy.

Does Paijan allow bankruptcy judges to reduce mortgage or other secured claims? Chapter 13 Standing Trustee Deb Miller believes that judges may modify and reduce secured claims that are late filed. She may even propose model plan language in the Northern District of Indiana which says: To the extent that a creditor entitled to protection under 11 U.S.C.

§1322(b)(5) fails to timely file a proof of claim, the allowed secured claim will be reduced under 11 U.S.C. §§ 502 and 506 by the amount of pre-petition arrearage on the date of the petition.

Section 502 states: (a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest … objects.

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5. section 726(a) of this title or under the Federal Rules of Bankruptcy Procedure, except that a claim of a governmental unit shall be timely filed if it is filed before 180 days after the date of the order for relief or such later time as the Federal Rules of Bankruptcy Procedure may provide, and except that in a case under chapter 13, a claim of a governmental unit for a tax with respect to a return filed under section 1308 shall be timely if the claim is filed on or before the date that is 60 days after the date on which such return was filed as required.

Section 506: (d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless - (1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or (2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.

Under Section 506 the lien is not void only because of a late filed claim. However, Section 502 appears to give the judge discretion to determine the amount of the claim following an objection. I question whether this is a hearing to review the actual amount due or a certain sanction for the creditors failure to file a timely claim. I am also concerned that boilerplate language within a plan does not meet Bankruptcy Code or due process requirements of an objection to a late filed claim and subsequent notice and hearing requirements. However, Section 502(a) clearly allows any party in interest to object to a later filed claim and seek court determination of the amount of the claim.

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6. In re Todd LaMont and Christina LaMont, Case No 13-1187 (7th Cir. Jan. 7, 2014) – The Seventh Circuit Court of Appeals affirmed the Illinois bankruptcy and district court rulings holding that during the redemption period, the interest of a tax sale purchaser is a secured claim. Similar to Indiana, property taxes are due the year after the year in which they accrue, and a lien in favor of the county automatically arises at the beginning of the year in which the taxes accrue. If property taxes are paid, then the lien extinguishes, but if they are not paid the county may “foreclose” on its tax lien through a tax sale. When the property is sold at an annual tax sale, the tax purchaser pays all taxes due on the property, the county loses its lien, and the tax

purchaser receives a “Certificate of Purchase.” The most significant difference between the Illinois Code and the Indiana Code regarding a tax sale is that in Illinois the taxpayer has two years to redeem the non-residential real estate and two and a half years for residential real estate while in Indiana the taxpayer only has one year to redeem the real property. If the property is not redeemed, the tax purchaser must file a petition for a tax deed in the circuit court of the county where he acquired the Certificate of Purchase. In making its decision, the 7th Circuit Court agreed that Congress intended to adopt the broadest definition of the term “claim.” The tax purchaser argued that he held a future interest in the property and that he should be treated

similarly to a situation where real property that has been sold at a mortgage foreclosure sale. The Court disagreed holding that a Certificate of Purchase is a lien or at least a species of personal property (which includes certain statutory rights to protect the property from waste). However, a tax sale does not affect the debtor’s legal or equitable title, and the tax sale purchaser holds a unique, statutorily created secured claim. In effect, what the tax sale procedure does is sell the county’s equitable remedy to a third party, the tax purchaser.

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7. neither the Treasurer nor Auditor currently has a claim because all past due taxes, penalties, interest and other charges would have been paid in full by the tax sale purchaser so no Proof of Claim will be filed. Additionally, the redemption amount constantly changes right up until the date it is paid because of ongoing interest calculations and any additional, unpaid property taxes and other charges (i.e., sewer and other liens, etc.) which have accrued during the now 3-5 year redemption period. Secondly, State law prevents the Auditor from accepting partial payments. The Treasurer would have preferred that my office hold all money in reserve until there is a sufficient sum to redeem the property, but acknowledges that the trustee would not possibly be able to calculate a monthly payment amount to send to the Auditor because of the constantly changing redemption number. As a result, there is no such thing as a "partial redemption" - either it is all paid, together with accruing interest and charges, or no redemption occurs. Thirdly, State law requires Marion County to send out a Notice of Tax Sale and Expiration of Redemption Period to any and all parties who may have an interest in the property. However, Marion County is fairly unique in this requirement - in most other Counties, it is up to the tax sale purchaser to do a title search and send out this notice. The Treasurer is concerned that sending out the required notice would violate the automatic stay. The Court suggests a solution whereby the Trustee pay the claim holder directly and not the County Treasurer. “If the county clerk is unable to receive installment payments, he should inform the bankruptcy court which may adopt another solution such as payment directly to the taxpayer. [Footnote 20 See Real Estate Taxation § 10.69 (explaining an informal method where the taxpayer pays the tax purchaser, receives the endorsed Certificate of Purchase, and turns it in to the county clerk for cancellation so that the county’s tax records show that the Certificate of Purchase was satisfied).”

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8.

Debtor’s Failure to Pay Mortgage Outside the Plan May be a Material Default

Following the old adage “bad facts make bad law,” Robert and Pamela Formaneck did just that in their Colorado Chapter 13 bankruptcy and cost themselves a Chapter 13 discharge [In

re Formaneck, -- B.R. --, 2015 WL 4241154 (Bankr. D. Colo. [Case No. 10-20070-MER-13]

July 13, 2015). The debtors filed their plan in April, 2010 and the case was confirmed in December, 2010. The plan provided a cure of $43,055 pre-petition mortgage arrears owed to Wells Fargo and a direct payment outside the plan starting May, 2010. While the debtors did make all payments to the trustee, the debtors stopped making payments to Wells Fargo on the post-petition mortgage payments around October 2012. In 2014 the trustee filed a Notice of Final Cure pursuant to Fed.R.Bankr.P. 3002.1and Wells Fargo filed its response showing a post-petition delinquency of $109,022.42. The trustee thereafter filed a motion to dismiss for two reasons: first, pursuant to Section 1307(c)(6) the failure to maintain post-petition mortgage payments was a material default by the debtors with respect to a term of their confirmed plan; and second, pursuant to Section 1307(c) dismissal is in the best interests of creditors for cause because the debtors failed to notify the trustee that they were not making their monthly mortgage payments, thus defaulting under their confirmed plan. The debtors objected stating that their default was not material and in the absence of any harm to the trustee’s administration of the confirmed plan, only Wells Fargo had standing to pursue relief from the automatic stay or dismissal. The debtors also argued that their post-petition income vested in the Debtors after confirmation, and that they may “choose how to utilize their vested assets for post-petition payments.”

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9. for over thirty months is contrary to the terms of the confirmed plan and is thus a material default of the confirmed plan.

From an equity perspective, the court also refused to let the debtors “have their cake and eat it too.” The confirmed plan was the debtors’ “conscious promise to pay Wells Fargo outside the plan pursuant to their mortgage.” The debtors failed to amend their plan or adjust their schedules to pay unsecured creditors additional money with their decreased expenses. The debtors failed to account for how they spent the $109,022.42 post-petition mortgage payments. The debtors in this case paid tens of thousands of dollars into their plan, completed the confirmed plan base and ended up with no discharge because of their material default regarding terms of a confirmed plan. Results could be similar for failure to pay other secured creditors, post-petition tax claims, and maybe even domestic support obligations.

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10.

Mortgage Issues

Streamlined Loan Modifications

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11. Notice of Payment Change (other mortgage companies may file another Notice of Payment Change). Of course the trustee will need to commence making the arrears payments again, but if too many months have elapsed, then the plan may be underfunded and the debtor may face a motion to dismiss the case.

Debtors’ counsel need to be aware and respond quickly if they receive the following letter from my office:

Re: [DEBTOR NAME, CASE NUMBER] Dear [SALUTATION]:

Pursuant to the Federal Streamlined Mortgage Modification Program (SMP), your client, listed above, has qualified for a Home Affordable Mortgage Program (HAMP) trial plan. Such qualification has triggered the mortgage lender to file a Notice of Payment Change with the Bankruptcy Court. This trial modification may NOT have required your client to sign any agreement with the mortgage lender, and your client may or may not want to participate in this modification program. The lender presumes that if the debtor makes the payments under the loan modification program, then he or she wishes to continue the application and approval process for a permanent loan modification.

The problem is that your client’s plan requires our office to pay the mortgage payment, and we do not know whether your client wishes to be in this SMP or not. Please contact your client and review the terms of the SMP and trial modification. If your client does NOT wish to accept the changes in the mortgage and proceed with the application process for a permanent

modification, then your office should file a Motion for Determination with the Bankruptcy Court within twenty-one (21) days of the filing date of the Notice of Payment Change, stating that the debtor does not accept the proposed modification. If the motion is not filed, then we will presume that your client does wish to continue with the trial modification, and our office will commence making the new payment (and cease making further payments on the mortgage arrears claim). Please note that after the third trial payment, the debtor has only 60 days to file a Motion to Modify Secured Debt with the Court. Also note that there is no guarantee that

completion of the trial modification program will lead to a permanent loan modification. Please contact our office with questions or concerns.

Sincerely, John M. Hauber

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12. As an update, we very recently receive a Notice of Payment Change for a streamlined loan modification where all pre-petition arrears had been paid, but the debtor fell ninety days

delinquent post-petition. Now we have a very different and difficult issue. The trial

modification stated that the new payment was to start on November 1, 2015, but our system is set to make the contractual payment which was June 1, 2015. Therefore, even if we changed the claim to lower the November payment, once we received sufficient funds our system is set up to pay the higher payment until the delinquency is corrected thus nullifying the modification agreement. In these situations, we would need to stop paying on the “old” mortgage claim, and set up a new claim for the November payment. The issue is that we will disburse mortgage payments received for June through October to other priority and general unsecured creditors, so if the loan modification fails, the plan will almost certainly be underfunded at that time.

Debtor’s counsel will want to make sure that she follows up on the permanent loan modification process and files the requisite Motion to Modify Secured Debt with the court. The trustee will also expect a modified plan to correct the trustee conduit payments and potentially lower the plan base. Failure to monitor these cases may lead to a dismissal of your client’s bankruptcy when neither you nor your client ever requested or potentially even knew about the loan modification.

All Unsecured Creditors Paid in Full

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13. principal (thus causing the debtor to delinquent at the end of the bankruptcy) and the mortgage lender will know to apply the payment toward the post-petition mortgage payment and not toward any pre-petition arrears. So, if creditors do not file claims or the debtor’s disposable income allows the case to pay off unsecured claims early, my office may build a large enough surplus to pay the remaining life of the plan (i.e. all remaining conduit mortgage payments) without any further debtor payments. At that time we will terminate the wage assignment on behalf of the debtor and send you an email which says:

Dear Counsel, Good News!

At this time, our office has completed paying all secured, priority and unsecured claims other than the debtor’s mortgage. In addition, the Trustee has a balance on hand that is sufficient to pay all mortgage payments due under the plan through the end of the plan life in ______ (assuming that there is no significant change in the amount due based on a Notice of Payment Change or Notice of Post-Petition Fees and Costs).

As a result, the debtor may stop making payments to the Trustee at this time. If there is a wage assignment in place, our office will be terminating it shortly. The debtor will be due to resume direct payments to their mortgage creditor in _____. A letter to your client and you will be sent prior to that time to provide up-to-date information relating to the payment amount and address based on the Trustee’s records.

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14. counsel is required to modify the plan. The modified plan must be specific regarding the month that the trustee is to cease conduit payments as well as the month that the debtor must recommence making payments. At that time, we will continue with our normal process which includes filing our Notice of Final Cure, reviewing any response, and contacting the debtor with a letter advising him or her when to start making payments again.

Wells Fargo Refund of Escrow Overage

Below is an excerpt from a letter that we received from Wells Fargo.

Effective August 31, 2015, Wells Fargo Bank, N.A. (“Wells Fargo”) will be changing its escrow refund process for customers involved in active cases under Chapter 12 or 13. Each year, Wells Fargo reviews the escrow accounts associated with mortgage accounts to make sure the escrow portion of the scheduled mortgage payment covers the property taxes and/or insurance premiums. Increases or decreases in the property taxes and/or insurance premiums may cause an overage or shortage in the escrow account. The change to the escrow refund process will result in checks for certain overage amounts being issued to the Trustee assigned to the case. When any post-petition annual escrow analysis is completed, if the account is post-petition current, or within 30 days of being post-petition current, and an escrow overage of $50 or more exists, that amount will be refunded to the Trustee assigned to the case.

This process will not impact overages that may exist on the escrow analysis prepared in conjunction with the filing of the proof of claim as required by FRBP 3001. The escrow overage refund check will be accompanied by a cover letter explaining the reason for the refund, a copy of the annual escrow analysis and a copy of the letter being sent to the debtor(s) in the case. The debtor(s) will also receive the escrow analysis. This process change will have no impact on the filing of any Notices of Payment Change that may be required under FRBP 3002.1.

To the extent the Trustee chooses not to include these funds in amounts to be disbursed under the plan, Wells Fargo would request that those funds be remitted to the debtor(s) and not returned to Wells Fargo.

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15.

Forms Changes

Most Official Bankruptcy Forms are scheduled to be replaced with substantially revised, reformatted and renumbered versions effective December 1, 2015, if approved by the Judicial Conference at its October 1, 2015 meeting in Washington D.C. These new forms are part of a forms modernization project that began in 2008 by the Advisory Committee on Bankruptcy Rules. Among other things, the new forms introduce different versions of case opening forms for individual debtors and non-individual debtors. According to the “experts” these new forms are easier for debtors to understand and complete, and are designed to work with scheduled enhancements to the federal courts’ case opening and electronic case management system.

Some of the modernized forms are already in effect and will simply be renumbered on December 1, 2015. Other forms were published for public comment in August 2013 or 2014 and have been approved by the Advisory Committee on Bankruptcy Rules and the Committee on Rules of Practice and Procedure (the Standing Committee). All but six existing official forms are on track to be replaced by modernized versions.

One item on their agenda is the national Chapter 13 plan form and the attendant bankruptcy rules. The Honorable Dennis Dow is a Bankruptcy Judge for the Western District of Missouri, and he is the chair of the Forms Subcommittee of the Bankruptcy Rules Committee. A few days ago, Judge Dow contacted Mary Ida as President of the National Association of Chapter Thirteen Trustees regarding the Chapter 13 plan form, the related bankruptcy rules, and the compromise proposal. Attached are copies of committee notes and the changes made since the previous publication.

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