Win Now, Wreck Later: A Tale of Bankruptcy and Mortgage Servicing

My Google Alert popped up a lovely win for a Chapter 13 homeowner , but all I could see was the train wreck that lies ahead.

The bankruptcy court ruled that the confirmed (and completed) plan trumped a late-filed mortgage proof of claim.

Payment of the amount provided in the plan cured the prepetition arrearage.

I’m on board so far.

But I doubt this resolution will be the last dispute on the matter.

The bankruptcy court fight

Here’s how it came about.

The debtor listed the mortgage arrears at $5000 in the Chapter 13 plan.

The lender’s tardy claim, filed a year late, put the arrears at double that amount.  No one noticed or addressed the discrepancy when it arose.

At plan’s end, the trustee objected to the lender’s secured claim.  And the lender argued that its lien entitled it to the unpaid prepetition arrears.

After argument and briefing, Judge Bohm held that “any action to collect or enforce a claim for delinquent prepetition arrearages inconsistent with the confirmed and completed plan is therefore disallowed.”

Neat.  I love a good court order as much as the next bankruptcy attorney.

But just coming off two fights this week with lenders who can’t even account for recent payments made, I see trouble coming.

The missing $5000

Here’s the problem I see.

Try imagining how the court’s order gets reflected on the books of the lender.

The lender showed $10,000 in prepetition arrears and the confirmed plan said it was $5000. (I’ve rounded the numbers for simplicity).

The decision designates $5000 of the amount shown in the lender’s accounting as uncollectible, upon pain of violating the discharge.

Hands up all you who think that the lender will reduce the amount owed on the loan in its records by $5000.  Or that this order will find its way to the parallel set of books we know lenders keep on loans in Chapter 13.

Maybe this servicer will note that this $5000 isn’t collectible. (Who thinks that is likely?)

But what happens when

  • the loan servicing transfers?
  • the debtors refinance and the servicer is asked for a payoff?
  • the debtors die and their heirs are selling the property?

Who will remember this homeowner victory and have the resources of time and records to realize its benefits?

Flaws in practice

Although this case is configured as an objection to claim, it parallels the drill under FRBP 3002.1 at case end.  It seeks to determine the state of the home  loan as the homeowner prepares to depart Chapter 13.

Too often, orders are limited to finding that the loan is “current.”  I would posit that “not being delinquent” tells us less than if the order included a date and the balance on that date, including any amount then in suspense.

Rule 3002.1 cases I’ve handled have the trustee simply issuing a notice some time after the last payment to the plan is made, and the servicer responding with its numbers as of the date of its response.

And if the dispute continues through a motion challenging the servicer’s response, the lender keeps updating its numbers along the way.

I’m not a good enough shot to hit a moving target.

Draw clear line

These case-end mortgage orders need more than a declaration, explicit or inferred, that the loan is “current”.

Otherwise, enforcing the order down the track means revisiting the entire loan history to show that the servicer’s post discharge handling is inconsistent with the court’s order.

These orders should include:

  1.   The end date of the history affected by the order:  “all transactions and charges through July 31, 2019”.
  2.   The principal amount owed as of that date.
  3.    Any suspense balance.
  4.    Any unpaid fees, expenses, and charges allowable but then unpaid.
  5.    Explicit treatment of any attorneys fees incurred by the servicer in the course of case-end proceedings.
  6.     A directive to enter on the servicer’s books any corrective entry necessary to reflect the court order.

That information would authoritatively establish the state of the loan and permit the homeowner to monitor the state of the loan going forward using Requests for Information provided by  RESPA.

Wasn’t that the point?