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Surprise!!! You've Earned a Discharge AND a Foreclosure

posted by Katie Porter

Tomorrow, the Senate is expected to vote on the Foreclosure Prevention Act of 2008, Title IV of which would permit bankruptcy courts to modify home mortgages in certain ways if the loan and the debtor met specified criteria. We've described that idea before, but the bill has crucial implications for bankruptcy that are not related to loan modification. Specifically, take a look at section 421, which proposes a solution to a problem with current bankruptcy law. Many Chapter 13 debtors pay for 3 to 5 years on a repayment plan, doing everything the law requires of them, and only a week or two later, face a foreclosure. How does this happen? Because the mortgage servicers frequently assess charges during a bankruptcy case, but fail to disclose these fees. Courts don't approve them; trustees don't adjust the debtor's payments to account for them; and debtors aren't even given notice that these charges are piling up. Instead of emerging from bankruptcy with a fresh start, homeowners find themselves defending a foreclosure or having to immediately pony up hundreds or thousands of dollars. Just last week, Judge Brendan Shannon of the Delaware Bankruptcy Court addressed this issue, challenging lenders to disagree that these undisclosed "surprise" fees don't "frustrate" bankruptcy's home-saving purpose. The Foreclosure Prevention Act of 2008 tackles this problem by requiring mortgage companies to disclose all fees within the earlier of 1 year of assessing the charges or 60 days before the end of the bankruptcy. The law also specifies that a lender may only charge such fees if they are lawful, reasonable, and provided for in the contract. It's sad that this latter requirement is even necessary--it essentially just prohibits mortgage servicers from violating existing law by overcharging consumers, a problem that an increasing body of case law and research suggests occurs with alarming regularity. I see lots of reasons why permitting bankruptcy courts to modify mortgages may be the best comprehensive solution to the foreclosure crisis, but I also hope Congress takes a hard look at the rest of the bill and considers its overall importance. If consumers do their part in bankruptcy and make every payment required by law, the system should honor its promise to give them a financial fresh start.


What about exisiting Bankruptcy Code section 524(i)? Doesn't that take care of the alleged problem? Any consumer debtor attorney that does not draft language in the plan to take advantage of that section may be committing malpractice.

... Too simple rcerone if it could only be that simple. Unfortunately we have what’s called anti modification pursuant to 1322(b)2. I agree that the discharge injunction that comes by order at the end of 13s is the way to go to bring these issues but its not cheap. One you have to re-open the case once its discharged and file and adversary to determine the dischargability or make a claim that they violated 524i and 1322s right to cure provisions.
Most of the time if a debtor includes an arrearage mortgage claim in their 13 they are paying regular payments to the Mortgage Co. directly. What if they are late or miss a payment and maybe that happens in say 5-12 of the 60 months they are in? The mortgage co. will be reluctant to make a demand on those allowable late fees for fear of violating 362. Debtors are out and discharged what happens to all of those allowable late fees that BK are not allowed to modify? If the contract says they can charge for that BK cannot modify as it stands now. Your only hope would be that they messed up in crediting payments made in accordance with the confirmed plan ie. pooling pmts from 13 trustee into an escrow account and charging late fees for pre-petition arrearages (post-petition arrearages via Mendoza) paid thru the plan. If that gets thru and it is those charges that are the subject to foreclosure action post discharge then yes! Nail them! Please! Hopefully they settle. If not… admissions, production, interrogatories, depositions, DCC’s, 12(b)6’s and maybe the Judge will grant at the very least a reopening of the 13 case.
Other than the misapplication of payments from 13 Trustee the Judge will have his hands tied as to those fees. I say change 1322b2 to allow bk judges to modify the mortgage contract as to those fees and other aspects of the mortgage that may frustrate the bk system.

524(i) doesn't solve the disclosure issue. It doesn't require companies to let debtors, courts, or trustees know about new fees that are allegedly incurred post-confirmation. 524(i) provides a remedy if the mortgage company misapplies arrearage payments (or direct payments too if made through the plan), but itself doesn't require disclosure or court approval of these fees. In fact, see 524(j).

A further problem is that some courts won't let debtors put 524(i) language in the chapter 13 plan, arguing that the section is superfluous. Those decisions may decrease the confidence in or willingness of consumers or attorneys to try to use 524(i) as a tool.


Just thought I'd make sure that this was on your radar Prof. Porter....

Patches, sorry I haven't had a chance to get back to you. Been up to my eyeballs in my case the last few weeks. Will be in touch ASAP.

No problem Mike doing a little multi-tasking myself. I Read that Adv. looks like Countrywide filed false statements in that in their 362 motions they would have had to have a statement from Countrywide attesting to the accuracy of the amounts claimed. I think there are some provision in FDCPA on that subject "filing false pleadings". Also there could be RESPA and TLA violations in that ADV. if they wanted to. This looks almost exactly like (In Re: Nosek v. Ameriquest Mortgage. Co.) WD of Massachusetts Adv. No. 04-4517 and practically every other Relief from Stay I’ve seen from 1995 to 2005. Very common practice!

On the issue of FDCPA I didn’t see it on 362 motions but in a case where credit card or mortgage co. filed a Motion for Default judgment in state court claiming defendants did not submit admissions, interrogatories etc. on time when in fact they did and had proof. I know I printed it just cant find it right now. It could have been in a 7 where a Trustee was bringing the action.

ooops! forgot the "I" in Truth in lending Act. My bad.... I had like 6 phone calls while I was trying to post....

I just filed chapter 13, but the bankruptcy attorney said that it won't stop the foreclosure, it will just push it out 60 days or so. Are you saying rcerone or katie porter that this 524i or any other law can help me. The loan rep knew I was on alot of meds due to a broken back and coerced me into this refi and then ripped me off. I would do anything to go back to my prior loan. I paid $1200 P&I and impounded taxes of $106 per month for a total of $1306 pr month. Now it's $2236 p/i no taxes or insurance included. That's my take home. How did this loan guy get the mortgage company to use 5 to 6 month old paystubs and documents to get an approval on this loan. My mom had been severly ill and on deaths door for 3 months and then my father got a brain infection and died right after. 2 months later I brake my back. My credit was ruined by then because I fell apart due to greiving, except for my mortgage. I had a great loan through a credit union because the last time I had refied, I had excellent credit. My interest rate was 4.75% for 5 yrs. then adj 30 yr loan. I figured I would watch the interest rates and sometime within 5 years when rates are low I change it to a 30 year fixed. Instead my life fell apart and then on top of that, I get ripped off and completely coerced while I was Ill and on to many medications to be doing any financial dealings. I'm looking for other people who have been swindled by Fidelity National Mortgage in Santa Ana, or even more specific Scott Anderson. or both. Also Fremont investment and loan was who Fidelity got to buy the loan. So they must be involved to. They were all in this to steal my home. Please contact me if you have a case going or you know of a class action suit against any of them. Thank you Araminta Babcock of Santa Rosa, CA

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