Back
CLIENT ADVISORY - February 4, 2008
Southern District of Illinois Requires Court Approval on Post Petition Fees and Charges on Residential Real Estate Loans
by John L. Day, Jr., Esq.
The Bankruptcy Court for the Southern District of Illinois has issued a new model Chapter 13 plan that makes a significant change in the way residential real estate loans are treated. Even though this is just one court, it is part of a trend we see developing nationally. The new plan provides:
- The court must approve all fees and/or charges incurred by the creditor prior to the discharge
- The court must also approve fees and charges incurred before discharge but assessed after discharge
- All payments received from the trustee must be credited by the creditor as the trustee (plan) directs
In our Client Advisory on August 22, 2007, we advised our clients that we were seeing more instances where debtor's counsel were adding provisions to Chapter 13 plans requiring application of payments exactly as provided in the confirmed plan and requiring lenders to provide notice to the trustee, debtors and debtor's counsel before making a payment change. The court for the Southern District of Illinois made this procedure mandatory.
Lenders currently provide notice to debtors prior to changes in payments, however computer systems may not be able to send duplicate notices to trustees and debtor's counsel. The wording in the notices may need to be changed as well.
The more difficult and expensive requirement may be the necessity to refer files to counsel to file special notices to approve fees and or charges. The special notice is required where there is an adjustment to the amount of the regular contractual installment payment due to a change in the interest rate or for an escrow payment of insurance or taxes. If the debtor does not object within twenty (20) days, the trustee will automatically begin the new disbursement amount.
Timing is also a challenge. This new requirement applies to all fees and charges incurred prior to discharge. Since fees may often be incurred just days prior to the issuance of a discharge, the creditor will still need to secure court approval to add the fees and charges after discharge. Late fees and property inspection fees may be too small to warrant the expense of filing a notice.
The failure to secure court approval means the creditor may not add that fee or charge to the account. If a creditor attempts to collect fees and charges, which are not approved by the court, they may be guilty of violating the automatic stay or post discharge injunction. Such violations could result in the award of substantial damages and attorney's fees. This could also form the basis of a class action.
We expect to see more courts adding similar requirements to model Chapter 13 plans, and debtors adding similar provisions to individual plans. It is extremely important that mortgage lenders stay up-to-date on these requirements and carefully adhere to the requirements in confirmed plans.
If you have any questions on this information, please contact Mr. John L. Day, Jr., Esq.
Mr. Day is a partner in the Bankruptcy Department of the Cincinnati office of the Real Estate Default Group at Weltman, Weinberg & Reis Co., L.P.A. Mr. Day can be reached at (513) 723-2206 or via e-mail at jday@weltman.com.
Client Advisory is published by Weltman, Weinberg & Reis Co., L.P.A., an organization providing comprehensive creditor representation. The information contained in this advisory is a summary of legal information and is not intended to constitute legal advice on specific matters or create an attorney-client relationship. Contact any of our offices or visit our website at realestatedefaultgroup.com for more real estate related information, company facts and attorney profiles. ©2008