Lender Beware – Judge Hoffman provides guidance on the meaning of Bankruptcy Rule 3002.1 and the consequences of failing to comply.

Case Summary by Donald R. Lassman, Law Office of Donald R. Lassman

Infrequently the subject of court review, Judge Hoffman recently had the opportunity to consider Rule 3002.1 and, in particular, the penalties that may be imposed upon a creditor that fails to comply with requirements of the Rule relating to the timely filing of notice of post-petition fees, expenses and charges. 

Rule 3002.1 applies in Chapter 13 cases (1) to claims that are secured by the debtor’s principal residence and (2) where the plan provides for payment of the claim by contractual installment payments.  Rule 3002.1(c) provides as follows:

“The holder of the claim shall file and serve on the debtor, debtor’s counsel, and the trustee a notice itemizing all fees, expenses, or charges (1) that were incurred in connection with the claim after the bankruptcy case was filed, and (2) that the holder asserts are recoverable against the debtor or against the debtor’s principal residence.  The notice shall be served within 180 days after the date on which the fees, expenses, or charges are incurred.”

In the Chapter 13 case of In re Lescinskas, 2021 Bankr. LEXIS 360, 2021 WL 623698 (Bankr. D. Mass. Feb. 17, 2021), the mortgage lender filed a Notice on March 11, 2020 that included unpaid legal fees, costs and expenses incurred by the lender since case commencement in 2015.  The Debtor objected to the Notice on the grounds that it violated Rule 3002.1(c) because it included fees, expenses and charges that were incurred more than 180 days before March 11, 2020, the date that the claim was filed, and requested that the Court allow only those fees and expenses incurred after September 13, 2019 (i.e. the date that is 180 days before the filing date of the Notice). 

The Court explained that the purpose of the rule was to prevent lenders from accumulating fees and charges during the pendency of a bankruptcy case and then springing the charges on the debtor at the conclusion of a case when the debtor may have no ability to pay.   Requiring notification of fees and charges during a case provides debtors with the opportunity to review and contest fees and charges and, if appropriate, adjust plan payments to address the post-petition charges.  Concluding that the mortgage lender’s “kitchen sink defenses were unavailing”, the Court ruled that the mortgage lender’s fees and charges would be limited to those incurred within 180 days of the filing of the Notice, thereby reducing the amount recoverable from the debtor by over 90% from $11,278 to $1,207.34.  The lesson of the case is clear – creditors holding claims secured by a debtor’s residence should file Notices of Charges every 180 days in order to preserve their ability to collect those charges from the Debtor.