In a February post to Credit Slips, Katie Porter pointed out a recurring problem for U.S. debtors trying to deal with mortgage defaults through a Chapter 13 plan. They can make all of the payments needed to cure their pre-bankruptcy defaults and all of the principal, interest, and escrow payments that become due while the case is pending, but still end the case substantially behind on their mortgages, due to additional fees and charges claimed to have accrued during the case, such as mortgagee’s attorneys fees, inspection fees, and late charges. Professor Porter voiced support for proposed legislation—the Foreclosure Prevention Act of 2008—that would require mortgagees to give notice of such post-bankruptcy fees while the bankruptcy case was still pending, so that debtors could either challenge the fees or provide for their payment under bankruptcy protection. But the fee-notice provision was only one part of the proposed legislation. The legislation also provided for modifying the terms of home mortgages in bankruptcy, and with opposition from mortgage providers, it failed to survive a filibuster threat.
Perhaps a new bankruptcy rule on disclosure of mortgage fees—unconnected to mortgage modification— could deal effectively with the problem. Like the proposed legislation, a rule could require mortgagees to give reasonable notice of extra fees or charges that arise during the course of a Chapter 13 case and could provide that if the required notice is not given, the fees may not be assessed. A streamlined procedure for resolving any disputes over the fees could also be implemented by rule. Although the process of adopting a rule is long—generally at least three years—it has the advantage of being insulated from much of the political pressure brought to bear on Congress. Moreover, in contrast to their response to mortgage-modification legislation, mortgage providers might support a rule on notice of post-bankruptcy mortgage fees. Currently, local courts and individual judges have adopted a variety of methods for dealing with such fees (for example, Section B.2(b) of the model plan for the Northern District of Illinois). A uniform rule on the question would offer reduced costs of compliance for mortgagees, as well as a level of protection for debtors.