Bankruptcy

Supreme Court Says Creditors Should Read Their Mail

By Wendell Sherk, Missouri Attorney

Yesterday, a unanimous Supreme Court concluded that bankruptcy creditors ought to read their mail once in awhile.  Perhaps even pay attention and act upon what they read there.  Otherwise, they have only themselves to blame.

This not so remarkable — yet important — decision involved a complicated — yet simple — case.  A man filed a Chapter 13 plan in 1993.  He included a provision in this plan that would discharge the interest on his student loans — something that normally would require he prove undue hardship through an adversary proceeding.  He mailed a copy of this plan to the lender.  The lender filed a claim asking to be included in the case but did not object to the plan.  So the court approved the plan.  The consumer completed his plan, received his discharge and that should have been the end of it.

But the student loan lender did not agree and sought a ruling from the courts that it should not be bound by the plan.  It admitted it received notice of the case and a copy of the plan.  It just apparently didn’t read the plan.  So several years after the fact, it wanted to go back and “fix” the problem.

The Supreme Court disagreed.  It said, in effect, the federal rules allowing a party to a case to set aside “void” judgments or decisions should not be used in this way.  And this is true, even where the debtor has included a provision in the plan which would normally not be allowed.  If the creditors, the trustee and the court do not object, it will be binding on the creditors who receive actual notice and sleep on their rights.

Of course for most people it doesn’t take the Supreme Court to tell you to pay attention to legal mail.  Many children and most adults could grasp this simple logic.  But the irony is that multi-billion dollar companies would prefer the courts change the rules so that carefully reading the fine print of documents sent by consumers is not required.  Of course there’s little appetite among large creditors to have the fine print disregarded — if they wrote it.

The predictable next step is already presaged.  If you thought that means large creditors will devote more resources to paying attention to Chapter 13 plans, then you are probably wrong.  They will lobby Chapter 13 trustees to protect them from the nefarious plots of consumer debtors to “put one over” on them.  After all, the trustee has to read the plan, so why not get her to absorb the extra costs of objecting to “inappropriate” plans.  No muss, no fuss.

After all, Citibank and Chase and Wells Fargo really are no match for a single bankrupt consumer and her lawyer.  Even if the Supreme Court thinks otherwise.

Full post as published by Bankruptcy Law Network on March 24, 2010 (boomark / email).