Is your Chapter 13 plan  paying back mortgage payments that were delinquent when you filed bankruptcy?

If so, a tax deduction lurks, unclaimed, in the trustee’s records.

Track down that tax deduction and you reduce your federal income tax burden.

But it’s difficult because, for reasons I have not been able to figure out, the lenders don’t send IRS form 1098’s to either you or the trustee for mortgage interest paid through the plan.

So you don’t have proof that mortgage interest was paid, and neither does the IRS.

But, we can fix that.  I recently had occasion to walk a client through the process of figuring out the mortgage interest paid by the trustee.

I’ll retrace my steps and you can see how I figured out that he’d paid some $50,000 in mortgage interest  over the years of his plan that he hadn’t yet claimed on his taxes.

1.  Find the interest element in the lender’s proof of claim.

To be paid through a Chapter 13 plan, the lender must file a proof of claim on official form B410.  The mortgage attachment to that form, B410A has a line in Part 2 for “interest due”.

That line shows us what part of the missed payments, as of the filing of the bankruptcy case, was made up of mortgage interest.

2.  Calculate what percentage of the arrears is mortgage interest.

Part 3 of the mortgage attachment form breaks out the elements in the lender’s claim in the bankruptcy.  We need to know what fraction of the total claim the trustee will be paying is interest.

Take the “interest due” amount you located in Step 1 and divide it by the total at the foot of Part 3.

That’s the percentage of the total claim of the lender that’s interest.

3.  Access the Chapter 13 trustee’s site for payments to mortgage creditor

Chapter 13 trustees use different software to account for their operations.  You should have received information at the beginning of your case on accessing information about your payments and the trustee’s disbursements.

If you need help with the trustee’s web site, call the trustee’s office for help.

On the trustee’s site for your case, find the claim filed by the mortgage lender.  There should be a list of the date and amount of each payment made to the creditor on account of your mortgage arrears.

Total the payments for the last calendar year and multiple that total by the percentage of the claim that is interest, from Step 2 above.

Bingo! you have the number that represents what the trustee paid your creditor in mortgage interest for that calendar year.

Tax accounting rough and dirty

Your figure for mortgage interest paid in a year is an approximation.  By the end of the plan, the amount of interest paid will equal the amounts you’ve calculated this way.

The creditor may have applied it to your account differently.  Mortgage loan servicing is so erratic and inaccurate these days that it’s hard to tell.

If this calculation is off, it probably underestimates the amount of interest in the early payments from the trustee.  Most mortgages require the lender to apply payments first to interest, then to principal, then to expenses.  My experience is that they seldom follow the rules.

If anyone objects to your calculation, make them propose a better one.  Or make the recipient of the mortgage interest account for it in the usual way.

Save your work

Outside of bankruptcy, the lender would send you and the IRS a copy of their report on Form 1098 for mortgage interest you paid during the tax year.

We’ve done this sleuthing because they didn’t tell either the IRS or you what you paid in mortgage interest.

So, you may have to show the IRS how you got to a deduction that doesn’t appear in their records.

Print or save to pdf each of the documents you used to make your calculation.  You want to be able to support the deduction if challenged.

Another path to tax deduction

Alternatively, you could use the Request for Information process found in RESPA to ask the servicer of your loan how much interest you paid in a calendar year.

Servicers are required to provide answers about loan servicing within 30 business days of your request.  Requests must be in writing and contain identifying information.  More on how to make a Request for Information.

Amend earlier returns

Federal tax law allows you to amend tax returns for three years from filing.  There’s an IRS publication for amending returns.

You can calculate what you paid through the Chapter 13 plan for prior tax years and amend those returns to claim this deduction.

Gather your calculator and get on the trail of these illusive, but valuable, mortgage interest deductions.

 

Spoiler Alert:  As a borrower, you  are an expendable resource in home loan servicing to be exploited for fees and charges.

And those who could do something “hear no evil, see no evil, speak no evil”.

Meanwhile, you and other borrowers are the enemy in something once referred to decades ago as “Combat Loan Servicing”.

Borrowers just trying to keep their homes are subject to a campaign of systematic and deliberate deception. This fundamental deception is now often combined with the fraudulent surcharging of fees costs and other “expenses” designed to make vast additional amounts of money for lender/servicers.

When used aggressively, their techniques run homeowners slowly into foreclosure, resulting in the permanent loss of home(s).

If the hapless borrower manages to retain the home, lender/servicers make hundreds of millions of dollars of additional annual revenue at little or no cost. (They make this money by doing as little as possible and getting you to do or not do things for which they can aggressively bill you.)

In many cases, both the Racketeering Influenced Corrupt Organization Act (“RICO”) plus the federal mail and wire fraud criminal laws are  violated. Federal and state regulators have known about these practices for years. However, Lender/servicers have had a de-facto exemption from enforcement.

Sound overdramatic? Read on and decide.

Representing without Representation…

The homeowner/borrower nightmare(s) typically start with an endless cavalcade of ever-changing parties “representing” the lender/servicer.

Here’s the REALITY:

Lender/servicers frequently subcontract out the process of servicing your loans including applying for (among other things) loan modifications. By this I mean lender/servicers actually “farm these functions out” to ACTUAL SUBCONTRACTORS (FULFILLMENT COMPANIES) WHO DO NOT WORK FOR THE LENDER/SERVICER.

In the case of Ocwen, it was recently fined by the State of Washington for subcontracting out sensitive loan servicing functions to unlicensed entities in India and the Philippines.

Please note the federal government and the government of California seem to have NO problem with such practices by Ocwen or anyone else.

These subcontractors answer the phone, act, walk, and talk like they ARE the employees of the lender/servicer.

But in many cases these subcontractors are not tied into the lender’s computerized system in any way. They are sometimes in fact not even DIRECTLY employed by the lender.

They may work on the lenders’ premises or in remote locations neither owned nor operated by the lender/servicer. They have letterhead that says they ARE writing to the borrower as though they are the lender/servicer. The letterhead even has the lender/ servicer’s address and a phone number on it… AND IT LOOKS GOOD.

But it isn’t so. The result is utter chaos for the homeowner.

These subcontractors literally don’t have the authority to do anything. Often, they have to strictly follow  a pre-approved script for all their interactions with borrowers. The subcontractors will have a half dozen or so “canned form letters” they are permitted to send. NO OTHER WRITTEN COMMUNICATIONS WHATSOEVER are permissible. These subcontractors cannot change ANY language in the form letter(s) or modify them even slightly.

• Ever receive a letter from your “authorized contact” at the lender/servicer that seemed totally disjointed and disconnected from everything you had labored to achieve with him/her up to that moment?
• Ever receive a letter totally non-responsive to the written request you faxed to your point of contact?
• Ever receive a letter telling you the EXACT opposite of what you’d discussed verbally on the phone?
• Ever been told on the phone your loan mod was approved and then receive a letter saying you did not send documents required?
• Ever try to get your “contact” to fax you a confirmation in writing that your loan mod was approved (or that your foreclosure was postponed) after they assured you of this verbally on the phone?

Ever notice that you are often told your phone call(s) to a lender/servicer “…may be recorded for quality assurance” yet lender/ servicers ABSOLUTELY REFUSE to allow you to record them from your end of the phone?

In our law office, we’ve heard scores of variations on every theme listed above. We’ve spoken to hundreds of homeowners with the identical problem(s) and different lenders across California and the country.

The State of  Washington fined Ocwen $900,000 for using unlicensed, off shore entities to service Washington home loans.

Multiple federal agencies have been made well aware of these facts by tens of thousands of homeowner/borrowers. The present and past Attorney(s) General of the State of California have been told by desperate homeowners struggling to save their homes as well as by those who lost their homes.

The California AG has done nothing about this. They are not supposed to do anything about it because THIS (subcontracting out critical functions) is a technique governments have been using for years. Now it’s gone main-stream and is being used to service your mortgage.

How They Do It In 10 Steps

1. Use an endless stream of disappearing individuals “representing” the lender/servicer but really working for the subcontracting “fulfillment entity”.

If you are dealing with subcontractors “ AKA: organizational transients” with less staying power than a candle in a windstorm, no one is around long enough to pinned down to any narrative save the one the lender wants. These people don’t actually work “there” so they are not likely to be “there” very long.

You’ll get a “single point of contact” alright, it just will be a different one almost every time you call. Of course your home is the most important financial asset many of us will ever have, but no matter.

2.  Only allow borrowers to send letters/documentation by FAX. 
No email addresses are to be given out. Instruct personnel to inform borrowers that direct post office and email address are unavailable and/or cannot be given out to “non-authorized personnel.”

They insist upon the fax because there is absolutely no legal way for the borrower/homeowner to prove they sent anything to the lender/servicer AND that the lender/servicer actually received it. Lender/servicers then have plenary power to claim that they never received any document the borrower/homeowner sends.

No, the little printout you get that says the transmission was “good” doesn’t prove the lender physically received your documents.

3.  Make the borrower/homeowner keep sending the same information and/or going over the same items week after week.
Subcontractors are typically compensated for their time handling a matter NOT for getting you a loan mod or unscrambling the mess the lender/servicer made out of your escrow account. The more time they spend, they more they typically earn. Hence work expands to fill the amount of hours that can be billed to accomplish as little as possible.)
4.  Give the borrower/homeowner very specific BIZARRE instructions as to where to send payments and the specific manner for doing so.
This often means the people you are dealing with on behalf of the lender/servicer are not integrated into the lender/servicer’s actual computerized system for “boarding” loans.

In other words your money is going off into the “ether” and may or may not EVER show up in the lender/servicer’s records in the place and category it should be in.

Often as not these payments find their way to a “suspense account”. That is very bad for the borrower because these payments are virtually never put where they should have gone. PLUS they are not posted as payments hence you are “late”, then you attract late payment charges and ultimately you may end up in default.

Often the borrower/homeowner is obliged and instructed to send monthly house payments by certified check, Western Union, SPEEDPAY etc.

Almost certainly this means your loan is not in the lender/servicer’s actual computer system. This also facilitates letting the subcontracted “fulfillment” entity handle the process (and your money) off the lender’s actual books.
5.  Halt monthly statements to the borrower under one or more pretexts.
As the new servicer or subcontractor, claim to have records of only the original unmodified loan. When statements are restarted do not reflect the loan mod terms in the statement.

This typically means after some decent interval they will begin demanding a much larger amount than the modified payment borrower has been paying. You can’t figure out what the lender/servicer is doing if they don’t give you anything to look at.

This is really not good.

One of the most basic features of having a REAL loan is a monthly statement reciting what is owed, what has been paid and when lender/servicers often “interrupt” statements when a new servicer “takes over” for the previous one, especially a loan modification was previously implemented.

Many lender /servicers will stop sending notices when you are in bankruptcy even though they clearly could do so with appropriate precatory language appended to the statements. By “going dark” they can “come back at” the debtor when they emerge from bankruptcy with a demand that utterly obliterates any hope that they got current in bankruptcy.

All the while the lender/servicers will claim they “had to do so”.

This practice got so bad, Chapter 13 bankruptcies now contain a “put up or shut up” motion that can be filed at plan completion, legally obliging the lender to “speak now or forever hold their peace.”
6.  Insist the borrower send in loan modification (complete with notarized signatures) back to the lender/servicer.
6.  Require borrowers make payments indefinitely while rebuffing any and all requests by the borrower to record proof of their modified loan for the public record.

Refuse to either give the borrower a recordable copy of the borrower’s loan medication, so as to “keep all options open for disavowing a modified loan” or allow future purchasers of the loan to do so.

Subcontractors working for lender/servicers will almost never provide recordable proof of the loan’s modification, and may even go so far as to tell you that it isn’t the lender’s policy to provide even a fully countersigned copy of the loan modification.

NOTE: It is extremely common for loan modifications to specify in writing that they ARE NOT VALID unless and until countersigned by the lender. But then again how will you ever know this if they won’t give you a recordable copy? Or any copy?)

7.   Never provide a street address or even a P.O. Box where borrowers can send ANY correspondence or documents if it can be avoided.
No matter how many times the borrower asks, insist that the lender/servicer cannot receive documents ANY other way EXCEPT BY FAX. If necessary, tell borrowers it will take much longer if they attempt to use mail or P.O. Box.

This is part of the “you gotta fax it to us ” scam discussed above. A real address would allow you to do two CRITICAL THINGS:

• You could determine you’re not actually dealing with the lender/servicer (by Googling the address.) and/or
• You could legally prove that you sent and they received critical items.

Email addresses and mailing address prevent the “strategic disavowal” of communications documents and the existence of contractual and fiduciary duties that lender/servicers don’t want to be held to, while holding the borrower/homeowner to only those rights that the lender/servicers want them to have.

This has worked for years. Not one federal or state agency has ever required lenders to cease these practices across the board in dealing with their customers. It would be so simple to require but state and federal regulators never did…

I don’t count RESPA, even in its current form, as I regard it critically deficient for the most part. RESPA never did go far enough and it still doesn’t.

What is worse by the time you use RESPA, lender/servicers have typically already “legally” done the damage to you that is discussed above. RESPA basically gives you the autopsy on your own financial murder.

8.  Make sure nothing happens.
Yes I mentioned this in my previous article, but “nothing” is the worst symptom of all because. in this context, NOTHING IS SOMETHING AND IT’S BAD.

“Nothing” is the one thing that should not be happening as you deal with the subcontractor for the your lender/servicer about specific concrete issues concerning the most valuable financial asset most of us will ever have.

Something should be happening. Something should be happening on at least a weekly basis until the issue resolved. Otherwise it almost NEVER turns out well for the borrower/homeowner, and it almost always goes REALLY well financially, for the lender/servicer.

Allowing “nothing” to happen for extended periods of time is virtually always construed by banks, attorneys and judges AGAINST borrowers. “Nothing” happening is always construed to be the borrowers fault.
9.  Induce the borrower to “reapply for a modification” if the borrower insists that they already have one.
If possible attempt to “explain” that the modification was only temporary, was defective, or was not approved by the investor. Make the borrower think that the “loss” of the loan modification is or must be THEIR fault.

Subcontractors and lender/servicers use this ruse to attempt to wipe out any prior loan modification you may have, or any progress you’ve made submitting paperwork. If they can get you to reapply you find that they will later argue any rights you may have had were superseded or waived.
10.  Play dumb.

Subcontractors and lender/servicers pretend, feign, ape and otherwise act the part of incredulous bystanders who’ve “Never seen anything like it.”

• They don’t know why you think you have a loan modification when nothing shows up on “their system”.
• They never received the documents you sent then yesterday or last week.
• They don’t know why you thought your foreclosure was postponed.
• They called or wrote you multiple times even though you have voicemail and received no letters.
• They never received your letters proving you have homeowners’ insurance.

They play dumb because they can. They can because they have used the tactics in 1-9 above to script, cleanse, and control the record.

Typically, neither the prior subcontractor-lender/servicer nor the current subcontractor-lender/servicer will actually assist you though they may pretend to do so.

This is especially true if you are on the phone with them. Instead they will express confusion, shock, awe, mock sympathy or an out-and-out aggressive refusal to recognize you have a modified loan or any other rights.

REMEMBER! It’s an act.

They know exactly what it was that happened to you. You are not the first person to have these issues. Thousands of people have said the same things to the individuals working as subcontractors and the lender/servicers.

It’s one of the reasons personnel are moved around so frequently. It is a technique that has been very successful in exacting huge penalties, fees and charges and profits.

Lender/servicers work on very thin margins and this is how they make BIG MONEY. They have done this for years with impunity.

Fight Back

Whenever you deal with a subcontractor-lender/servicer do the following:

1. ALWAYS Use OVERNIGHT MAIL WITH PROOF OF RECEIPT or UPS or FedEx with tracking.

Make them give you an address.

2. CONFIRM EVERY phone conversation with the subcontractor-lender/servicer in writing via overnight mail with proof of receipt, and DEMAND these written confirmations be added to your loan file.

3. DO NOT STOP sending your payments under a modified loan agreement because of anything a subcontractor-lender/servicer says. Keep paying even if they return the funds. Take the returned funds and hold them in an account for later use in court. Judges love it when they see you tried to pay, the lender would not let you, and you put the money aside to “pay what you owe”.

4. GET LEGAL HELP before  foreclosure proceedings are filed.  In California, foreclosure starts with a Notice of Default.

5. DO NOT ALLOW THE SALE OF YOUR HOME TO GO THROUGH if they do file a notice of default. (Once the home is sold in foreclosure it may be impossible to recover and the subcontractor-lender/servicers will have a massive payday.)

Consider filing Chapter 13.

6. ASK POLITELY ,THEN FILE SUIT. The legal system has actually been interpreted and twisted to protect the activities outlined above. That’s why so many of you who read this will say:

“That happened to me…”

It’s grossly fraudulent and yes…they do it with impunity. (Or at least they have in the past.)

Since prosecutors at the federal and state level don’t wish to file deceptive business practice, RICO, and mail fraud cases against national lenders, their servicers and the subcontractors they hire, it falls to you to hire an attorney and sue them.

Judges are becoming less likely to buy the lender’s malarkey.

 

Figuring out what you owe on your home loan can be harder than a calculus exam.

For most people, their mortgage is their biggest debt.  And their home is their most important asset.

Yet, the people accounting for your payments are increasingly incapable of the very basics of their job.

Things have changed since the local bank made you a loan to buy a house and collected the payments you made on that loan.

Now, home loans get sold to someone else the moment the deal closes.  The right to collect the loan payments is bought and sold separately from the right to the payment amount.

And increasingly, the servicers make mistakes as they cut  corners to make a buck.

What do you need to know to assess whether your loan servicer has got the numbers right?

1.  Principal balance isn’t what you owe

Ask someone what they owe on their mortgage and they’ll recite the principal balance.  The principal balance is the remaining part of the amount originally borrowed that is still unpaid.

Yet you may well owe additional sums:  delinquent payments that are mostly interest;  late fees;  escrow advances; or the junk fees that most delinquent loans are larded with.

Finding the principal balance gets trickier yet if the loan has been modified to include a non-interest bearing amount or some other, non standard adjustment.

So the amount necessary to pay off the loan upon sale, or refinance, may well include charges from the past plus fees for calculating what you need to pay to satisfy the debt.

2.  Payments are credited to oldest month unpaid

If you fall behind on a home loan, then resume making payments, your payment is credited to the oldest month still unpaid.

So the payment you make in June may be credited to February.

And the servicer will report that you remain due for June, even though you sent a check in June.  It’s all in the rules about how payments are credited under the terms of the note.

3.  Payments may not be credited

Loan servicers seem to have a separate “pocket” labeled “Suspense”  into which they sometimes dump your payment. They’ve got your money, they just haven’t credited it to the amount you owe.

The only reason for putting funds in suspense that seems justified is when the payment is too little to make a full payment on the loan.  Servicers don’t have to credit partial payments.

So, they put the money in suspense until they receive enough money to make the regular payment.

For reasons no servicer has ever adequately explained, I’ve seen suspense accounts in the tens or even a hundred thousand dollars.

So, a mortgage statement that doesn’t address any funds held in suspense doesn’t tell the whole story.

4.  Escrow accounts contain something extra

If your property taxes and hazard insurance are paid by the lender, you have an escrow account.

Under federal law, the lender is allowed to collect more than the sum of the year’s taxes and insurance as protection against the borrower’s non payment.

The extra money, the “cushion”, can be no more than 1/6 th of the annual expenditures.  It remains your money, it’s just held by the servicer should it have to pay when you haven’t paid.

You should get an annual escrow analysis that shows income and expenses in the past year’s escrow account and a projection of the coming year’s expenses.

That projection will determine what you pay in escrow payments going forward.

5.  Statement doesn’t come from owner of note

Ever since loans were bundled up and sold on Wall Street to investment trusts, the work of collecting your payments has been handed off to loan “servicers”.

The owner of the note pays a company to deposit your payments, keep track of fees and expenses, and take action if you don’t pay.

The servicer seldom owns the note, they just own the right to collect the money.

And servicers change.  Sometimes as often as we change the oil in our car.

When there’s a loan handoff from one servicer to a new servicer, details about anything unusual in the loan account sometimes get lost.

Get behind the monthly statement

The problem of finding out what the servicer thinks you owe became such a problem that regulations written pursuant to the Dodd-Frank act gave borrowers some clout.

Now, a borrower with a home loan can make a Request For Information about their loan and expect answers within a shorter period than under the old law.

If the servicing of the loan has changed hands, the borrower has a window in which to request information from the old servicer, to compare with what the new servicer thinks.

Find the “how-to” for a Request for Information.

More

Your mortgage and your credit report after Chapter 13

Bad mortgage accounting violates your Chapter 13 discharge

Get tax credit for curing mortgage defaults in Chapter 13

How Chapter 13 works

 

 

 

 

 

 

Sound the alarm.

What began as a trickle of Chapter 13 cases ending badly has become a torrent.

More and more, bankruptcy judges are strictly enforcing the direct pay term of Chapter 13 plans:

If your plan says you will pay your on-going mortgage payments directly, and you don’t pay as promised, the judge may dismiss your case without a discharge.

After three to five years in bankruptcy, you end up with neither house nor a discharge of your debts.

Bummer!

Chapter 13 plans have teeth

Here’s why failing to follow through on your plan can be fatal.

The Chapter 13 plan becomes a court order when it’s confirmed by the court.  It requires the creditors to wait for their money, sets out the payments to be made, and binds all parties to its terms.

In many districts, the trustee pays any arrearages on home mortgages, but the debtor pays the mortgage payments directly that come due during the plan.

But all too often, the debtor stops making the on-going payments to the mortgage lender, without telling any of the other interested parties, like their attorney, the trustee, and the court.

The lack of payments goes unremarked.

But with the advent of Rule 3002.1, there’s a reckoning at the end of the plan.  The trustee files with the court a notice of final cure payment, alleging that all is well with the mortgage.

When the lender responds that the debtor isn’t current on the post filing payments, all hell breaks loose.

Too often, the court finds that the debtor’s failure to pay the ongoing mortgage payments is a material breach of the plan.  Because the plan hasn’t been fully performed, the case gets closed without a discharge.

Presumably, foreclosure follows, or another Chapter 13 filing.

Why Chapter 13’s are dismissed

In the debtor’s mind, it’s easy to see the on going payments as something just between the borrower and the lender.  If the lender isn’t happy, it can ask for relief from stay.

But the bankruptcy system sees it differently.

Since the debtor proposed the terms of the Chapter 13 plan, there’s a logic in sanctioning the debtor if he doesn’t do as he proposed to do.

The court would certainly sanction creditors if they didn’t honor the plan.

Consequences of dismissal

Dismissal without a discharge means that none of your debts is wiped out at the end of the plan.

Sometimes, that’s OK, if you’ve managed through the plan to pay taxes or your car loan.

But more often, it means that your personal obligation on the home loan lives on, along with any of the unsecured debt like credit cards, pay day loans, and medical bills survive as legally enforceable debts.

If you stripped off an underwater mortgage or avoided a judgment lien in the Chapter 13, you lose those benefits.

Preserving your bankruptcy discharge

The trick to getting your discharge is simple:  speak up.

Talk to your attorney when you begin having trouble making the on-going mortgage payment.

Talk through whether the problem is temporary or the inevitable consequence of too little income or intervening circumstances.

There are fixes.

• You can modify your plan to terms you can live with as long as you are within the five year duration of a plan.
• Maybe you surrender the house.
• Maybe you reduce the plan payment til you catch up on the mortgage.
• Maybe you dismiss this case and refile again to include the new arrears in a new plan.
• Maybe converting to Chapter 7 works for you now.

But know that failing to address the issue puts the discharge at risk.  Chances are, you have too much at stake to keep quiet.

More

When a Chapter 13 falters

Why Chapter 13 plans fail

Can you change lawyers mid case?

Bankruptcy terms simplified