Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

The Real Causes of Bankruptcy

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The commentator who equated debt problems with irresponsibility nearly caused me to melt down, right in my office.

Irresponsibility, he said!

The idea that people who find themselves with bills they can’t pay got in that mess through flighty behavior  or self absorption is sooooo wrong.

Mindless spending is seldom the cause of bankruptcy in my experience.  Occasionally, yes;  routinely, no.

The need for bankruptcy is more often tied to

  • Job loss
  • Ill health
  • Business failure
  • Supporting multiple generations of family
  • Divorce

Credit card balances  are usually tied to basic living expenses, recent studies show.

The gig economy hasn’t helped.  Without employee benefits and regular work hours, workers find themselves responsible for providing insurance, tax withholding and without sick days or retirement plans.  And gig earnings seldom cut it for very long in the Bay Area.

The real cause of bankruptcy

In fact, I see people in my bankruptcy office because they followed the time-honored advice we give to each other.

They bought a house.

They started a business.

They cared for their extended family.

They robbed Peter to pay Paul rather than renege on their debts.

And, at some point, it all caught up with them.

Often, the problem looks like a tax problem and it’s IRS collection action that brings them to bankruptcy.

But the more likely cause is the fact they reduced their tax withholding to create cash to meet other obligations.  Or they paid their employees with “net checks” and didn’t pay over the employee’s tax withholding in order to nurse the business along a bit more.

Or, they are supporting  both adult, underemployed children and aged parents.

Then there’s the curse of home ownership.  During the Great Recession, created by manic buying of homes made possible by toxic loans, I often advocated for letting the house go as being an impossible financial burden.

But 10 years later, with home prices recovered and then some, I’m starting to see the up side of struggling to keep a home.

Rents are increasing as fast as home prices:  let the house go and you’ll pay nearly as much in rent, get none of the tax advantages of home ownership, and have no protection against continuing increases in rent.

Renters are even more vulnerable than those with overly costly homes.

It’s complicated

It’s cliche, but it’s true.

Every story is a bit different, but from where I sit, too many of us are just plain lucky that our economic fragility hasn’t caught up with us.

More

Debt settlement is a fraud

The three times when bankruptcy is justified

Credit heals

 

Not All Liens Are Created Equal In Bankruptcy

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Each of them is a lien, but all liens are not the same in bankruptcy.

And the difference between them drives how you can reduce or eliminate the lien.

A lien gives the creditor holding the lien an interest in the debtor’s property, real or personal.  Ordinarily, the lien must be paid off before any of the value in the collateral goes to the owner of the property.

Liens come in three varieties:  voluntary, judicial, and statutory.

While you’re stuck with some liens, some can be whittled down to size, and some can be eliminated altogether when you file bankruptcy.

First, we’ve got to know which kind of lien we’re dealing with.

Voluntary liens

Voluntary liens are ones that you agree to create in favor of a creditor.  A mortgage is a classic example, as is the lender’s lien on your car.

In business, a lender often insists on a lien on business assets to secure repayment of a loan.  The lien puts the lender ahead of other creditors in the fight to be paid.

Judicial liens

Judicial liens are, not surprisingly, created by judges.  They result from court judgments or orders creating temporary liens during the course of a lawsuit.

State law determines whether a judgment automatically becomes a judicial lien.  In California, the winning party must take an additional step of recording an abstract of judgment to create a lien on real estate in that county.

Statutory liens

Statutory liens are created by law.  Tax liens are ones we encounter most frequently.

Provisions of the tax statutes say that unpaid taxes become a lien on all the taxpayer’s assets.

Bankruptcy changes the rules

A cornerstone proposition in bankruptcy law says that a lien is only a “secured claim” to the extent that there is value in the asset for the lien to attach to.

A creditor may have a lien with a face value of $100,000.  But if the property it attaches to had only $15,000 of available equity, the lien holder has a secured claim for $15,000 and an unsecured claim for $85,000.

Another cornerstone of bankruptcy law says that, without additional proceedings in bankruptcy court, liens survive bankruptcy as a charge on the property they attach to.

So, we really want to know which liens are vulnerable to being voided or whittled down by a proceeding in bankruptcy and in which chapter of bankruptcy those proceedings can be brought.

Judicial liens lose to exemptions

In any chapter of bankruptcy, the debtor can avoid (invalidate) a judicial lien that impairs an exemption to which the debtor is entitled.  11 USC 522(f).

Depending on the numbers, the lien can be eliminated altogether if there is not enough value in the asset to pay the exemption and have anything left for the lien.  Or, the judicial lien may be reduced as required so there is value to fund the exemption.

This works only for judicial liens.  Exemptions don’t protect assets from voluntary or statutory liens.

Chapter 13 smites worthless liens

Lienholders are at risk in Chapter 13, where the debtor is reorganizing his financial affairs.

Liens that aren’t secured claims ( that is, that don’t attach to value equal to the lien) can be voided at the completion of the payment plan.

With two exceptions, even voluntary liens, which are usually beyond altering, can be stripped down to collateral value.  The exceptions are

  • voluntary liens on a principal residence where the lien attaches to some value, and
  • purchase money liens created within 910 days of a bankruptcy filing to buy a vehicle.

In all other situations, a lien is worth only the value of the collateral that secures it.

So, huge tax liens get cut down to the value of the available collateral, and wiped out at plan’s end.  Totally unsecured deeds of trust or mortgages can be avoided.

You gotta appreciate the power of Chapter 13.

More

How Chapter 13 works

Understand tax liens in bankruptcy

Cutting the car loan down to size

 

 

What You Think About Chapter 13 Is Dead Wrong

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bankruptcy misunderstanding

The difference between bankruptcy’s Chapter 7 and Chapter 13 is often expressed this way:   

Liquidation: the process of turning assets into cash

Chapter 7 is a liquidation proceeding

Chapter 13 is a repayment plan

 

And therein lies the biggest misconception about Chapter 13: 

13 does not repay everything you owe.

It’s a repayment plan alright, but not necessarily a 100% repayment .

You may not pay much at all, to any creditor.  It depends.

How much you repay

The amount you repay to creditors through your plan is determined by comparing

Rough and dirty, you calculate the number for each of these factors, and your plan must pay the largest of the three tests.  That payment is spread over 3 to 5 years.

Which creditor gets 100%

Bankruptcy law gives special standing for repayment to two common kinds of creditors.

  • Family support (alimony, child support, or other Domestic Support Obligations)
  • Recent income taxes or payroll taxes

These creditors have a priority for payment,  ahead of all other unsecured creditors.  They get paid in full.  The interest that accrues on family support obligations even survives the Chapter 13 discharge.

Therefore, to get court approval of a plan, the plan payments must be sufficient to make these payments, along with any fees of the Chapter 13 trustee and any of your attorneys fees to be paid through the plan.

Unsecured creditors out of luck

The brutal truth is that general unsecured creditors holding medical bills, personal loans, judgments for money, and credit card debt may get nothing in Chapter 13.

That’s because the available money is paid first to priority claims and the costs of administration of the case.  So a debtor with little disposable income may propose a plan that pays only the costs of the plan and the priority creditors.

Chapter 13 makes creditors face reality

The strength of Chapter 13 is that it often forces unsecured creditors to accept that there simply isn’t enough money to pay their claim.

The bankruptcy schedules show it, and the bankruptcy judge enforces it.

It is that coercive effect that makes Chapter 13 so much more effective than debt settlement:  if the numbers support it, the plan can pay them little or nothing.

So, don’t be put off by the phrase “repayment plan”.

Chapter 13 pays creditors only what you can afford, over a limited period of time, in the order of the importance of the debt.

That’s why I love Chapter 13.

More

Debt settlement is a dud

How secured debt can scuttle a Chapter 13

What bankruptcy should cost

 

 

 

 

 

 

 

California Homestead Exemption: The Truth Isn’t What You Think

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patchwork

“They can’t take my house, whatever happens.  Right?”

The young man in my office “knew” that the substantial equity in his home was exempt as a California homestead, even if he filed bankruptcy.

He “knew” that credit card debt was dischargeable.

And that “knowledge” lead to his conviction that , in bankruptcy, he could keep the house and ditch the credit card debt without payment.

Wrong.

In his mind, bits of legal truth got stitched together into a bankruptcy myth.  Let’s piece together the truth.

California homestead

True:  every California homeowner can claim a homestead in their principal residence.  CCP 704.720

UPDATE:California homestead increased

But:  the homestead is limited to a certain amount of value.  For the single guy sitting across my desk, that amount was $75,000.  Equity in his condo in excess of that isn’t protected by the homestead.

Worse, the homestead is only effective against certain kinds of creditors.  The tax liens that were of record for old tax years aren’t defeated by a state law homestead.   So the tax liens remain enforceable. *

Credit card debt is dischargeable

True:  unsecured credit card debt (not incurred by fraud) can be wiped out in bankruptcy.

But: the discharge speaks to whether the debt survives the bankruptcy and is enforceable afterwards.  Being dischargeable doesn’t mean that creditors don’t share in the bankruptcy distribution.

Asset value matters in bankruptcy

True:  every debtor can claim exemptions that protect the exempt amount from being paid out to creditors in the bankruptcy case.

But:  the asset value not protected by an exemption is available to pay the claims of creditors, as far as that value goes.  For most unsecured creditors, all they get from the debtor is their pro rata share of the non exempt property of the estate.   Any unpaid balance is discharged.

Bankruptcy truths

So when the bits of the law my client got right are expanded and seen as a whole,  any bankruptcy discharge was unlikely to result in paying less to his creditors. His house represented far more value than the debts, dischargeable and non dischargeable, that he owed.

Likely, in either Chapter 7 or Chapter 13, his creditors would get 100% of their claims.  In my view, any amount he might save in reducing the interest accruing on those claims to the bankruptcy interest rate would be eaten up by the legal fees to file the case, and the credit hit he would incur.

True story of huge savings on credit card debt

The one critical bankruptcy advantage might be the power of the automatic stay:  if the mortgage lender threatened a foreclosure before he could cure the secured arrears, bankruptcy could stop foreclosure long enough to either propose a Chapter 13 plan, or arrange family help to keep the house.

* In Chapter 13, the homeowner could strip a tax lien down to the value of the home after all senior liens were subtracted.  The stripped down lien would have to be paid in full through the plan.  The balance of the tax lien would be treated as an unsecured claim.

More

Bankruptcy myths abound

Everything you need to know about the California homestead exemption

Who gets paid first in bankruptcy

Life And Death of Debt In California

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statute of limitations on debt

CPR has its place when human life is involved. Human life is precious.

But when what’s dying is the legal right to collect a debt?   Not so fast.

You don’t want to breathe new life into an old debt that is legally dead.

Yet you can do that, unintentionally reviving a debt that is legally dead  by giving it new life when it’s approaching its life’s end.

California statute of limitations can be tricky.  I  originally intended in this post to explain the rules around the statutute of limitiations.  I wanted to show you how to keep from unwittingly extending your legal exposure to a debt.

I’ve concluded that the law is simply too complicated and evolving to provide a nuanced, reliable guide so you can avoid screw ups.

So, I’m adopting the Nancy Reagan approach to the statute of limitations.

Just Say No! 

NO, I don’t owe it.

NO, I won’t pay it.

While it may stretch the truth as to whether you owe it, it’s simple and safe.  It keeps you from adding to your exposure to old debts.

Admit nothing.

Avoid extending the statute of limitations

The statute of limitations allows enforcement of a legal right through the courts only if brought before the running of the statute.

Broad brush, you can extend your legal exposure to an old debt in two ways:

  • Make a payment on the debt
  • Admit that you owe the debt

Important to note that either of these ways of extending the life of a debt are acts that you, the person who owes the money, take.

The debt collector can’t extend the statute unilaterally.  Only by getting you to do something against your interests is the life of the debt prolonged. Here’s how they try to do it.

Payment breathes new life

Making a payment on the debt is putting your money where your mouth is:  you wouldn’t pay anything if you thought you didn’t owe money.

So payment is seen as proof that you owe the money.

Payment starts the statute of limitations clock running again, from the beginning.

That’s where the debt collector’s request for a “good faith” payment on a debt you can’t pay off at this time is so insidious.  The debt collector cares far less about the amount of that “good faith” payment than he does about the fact that you’ve just extended your legal exposure to the debt for an entirely new period.  What that period is we’ll discuss below.

Admitting the debt is fatal

An admission that you owe the debt, even without payment, can reset the SOL clock.

California law provides that only an admission of the debt in writing can extend the statute:

No acknowledgment or promise is sufficient evidence of a new or continuing contract, by which to take the case out of the operation of this title, unless the same is contained in some writing, signed by the party to be charged thereby, provided that any payment on account of principal or interest due on a promissory note made by the party to be charged shall be deemed a sufficient acknowledgment or promise of a continuing contract to stop, from time to time as any such payment is made, the running of the time within which an action may be commenced upon the principal sum or upon any installment of principal or interest due on such note, and to start the running of a new period of time, but no such payment of itself shall revive a cause of action once barred.  Code of Civil Procedure 360.

Yet there are precious few cases on the subject.

And while traditionally, the statute of limitations that applies to any collection suit was the law of the state where the defendant lives, recent cases make that less certain.  Topping off the uncertainty, the 9th Circuit Court of Appeals recently ruled that in bankruptcy, the statute of limitations of the state whose law applied to the contract controlled, not the shorter statute where the debtor lived.  Sterba

All of which makes saying nothing, or saying no, the safest course of action if you have an old debt that you can’t pay.

Why have a statute of limitations

Pubic policy says we want legal disputes resolved sooner rather than later.  If a lawsuit is involved,  we want the evidence  available and memories fresh.

It’s the legal version of  SNOOZE, YOU LOSE.

A debt collector or a debt buyer has the same statute of limitation as the original creditor.

When does the limitations clock start running

The SOL clock starts running on the limitations period upon the last activity on the debt.  That activity could be a payment on a debt;  it could be a charge on an open account.

If there are neither charges nor payments on a contract debt after that, the period runs for four years in California. 

Once the limitations period has run, the person who owes the debt has a slam-bang winner of a defense if the creditor files a lawsuit to collect. 

Cheat sheet on statute of limitations from the California Courts

More from the FTC on time barred debts.

More here on debt collection lawsuits

  What to do when you’ve been sued

Fighting back against wage garnishment

 

 

Which Debt Collector Threats Should You Be Afraid Of?

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debt collectors

Threats are the tools of the trade of debt collectors.

Why not? Fear is effective to get people to do stupid things.

That’s why debt collectors use it.

Pay up or…

  • we’ll send you to collection
  • we’ll sue you
  • we’ll ruin your credit
  • we’ll have you arrested
  • we’ll have you deported
  • we’ll take your house
  • we’ll tell your neighbors

Terror shuts down rational thinking and upends priorities. 

No passion so effectually robs the mind of all its powers of acting and reasoning as fear.

Edmund Burke

As a bankruptcy attorney, I  meet lots of people because they’ve panicked.  A debt collector has threatened them financially, and they are sure their world is coming to an end.

So let’s talk about debt collectors and the threats they use.  Just which threats are bluster and which are blockbusters.

Here are the questions to ask yourself.

How real ?

Is the threat real?

The classic scam is the one that goes:  we’re the police, we’re coming to arrest you for failing to pay, unless you want to send us money not to arrest you.

There are so many things improbable with this pitch that it’s amazing that it works.  But it does.

A variation is the collection call for a debt that isn’t yours.  Scammers  have invented a debt you don’t owe and hope to frighten you into paying rather than risk it.

Threat assessments:  it only pays to get worked up about debts that are real.

How soon?

Debt collector threats depend a lot on a sense of immediacy.  They want you to think that horrible consequences will follow immediately if you don’t pay.

This is where a bit of knowledge about due process comes in handy.

The legal system does provide for coercive legal methods to collect real debts.  But those coercive methods are available only after a dose of due process:  here, due process is a notice and a hearing.

Notice of a law suit filed against you, and a hearing on the merits of the lawsuit.  And those things take time and money.

A creditor with a meritorious claim can usually get a judgment, but it will take several months, at best.

So a smart debt collector wants to trade on your ignorance about law suits and to make you believe that he has instant access to the legal levers of collection.

The only creditors who can take money from your bank account without a court judgment are the taxing authorities and the bank where your money is on deposit.

Threat assessment:  the threat is real but it’s a long way off.

How damaging?

My favorite threat in this category is the infamous threat to “send you to collections”.

So?

“Collections” isn’t a real place.  You don’t get locked up in “collections”.

Being “in collections” doesn’t change your legal rights, or expose you to collectors with superpowers.

It’s just a management category for a creditor.

In fact, the collections department may be more willing to cut a deal on the debt than the people you’re talking to now.

Another favorite threat is the one to “ruin your credit”.

Even damaged credit heals with time and attention

It pays to know that creditors are limited to reporting the truth.  So, threat or not, they should be reporting the actual facts.

Is your credit really the most important piece of this puzzle?  Your “credit” mostly measures your ability to borrow more money.  The problem at hand is that you can’t pay for the credit you already have.

Threat assessment:   pretty weak, in the scheme of things.

How come?

Once you’ve assessed how real the collector’s threats are, it’s time to think about the big picture: is this debt an isolated problem? Or, are there other debts that will  ripen into similar problems?

Are you spending today’s income paying for yesterday’s expenses?  Are you shorting your emergency savings and your retirement account?

A sit-down with an accredited credit counseling service (not a debt settlement outfit) or a bankruptcy lawyer can help you identify and act on a plan for a solvent tomorrow.

More

Can you go to jail for not paying creditors?

Secret alternative to bankruptcy

How One Family Settled Huge Debt For Pennies

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debt settlement
When he started the Chapter 13 trek, he owed $370,000 in personal loans and credit cards.

As he completes his plan, he will have settled that debt for three cents on the dollar.

No tax is due on the forgiven debt and no listed creditor can legally come back to try to collect the difference.

And that’s why I love Chapter 13 bankruptcy.

Chapter 13 in the real world

I’ve talked here lots about how Chapter 13 is structured, how plan payments are calculated, and all the nifty things Chapter 13 can do for those with bills they can’t pay.  It’s sometimes dry and dense, but you see how it works.

But here’s how it worked for one real family now completing their plan.

They confirmed a Chapter 13 that resolved their debt for 3% of what they owed when they filed.

They got five years to pay that 3%, interest free.

The payments through their plan cured any pre bankruptcy arrears on their house, in full and without interest or penalty.

They were protected from the taxing authorities while they cured delinquent property taxes.

And in our insane real estate market in the Bay Area, their home appreciated about 50%.  Appreciation that is theirs, rather than their creditors’.

Plan payment driven by asset value

Not all unsecured creditors are as lucky as the creditors in this case, who got something on their claims, even if it was only three cents.

Because the couple had some stock and other assets that weren’t exempt, their plan had to guarantee unsecured creditors a share of the $11,500 value of those non exempt assets.

Based on their income and the infamous means test, general unsecured creditors wouldn’t have gotten anything.

So, the take-away is that just what you have to pay in Chapter 13 is decided by the interaction of the kind of debts you have; the income that the law says is available to pay those debts; and the value of your non exempt assets.

But seen from the top of this mountain, Chapter 13 is powerful.  And the view of life after bankruptcy is stunning.

More

Life after bankruptcy

How Chapter 13 plan payments are calculated

Little known alternative to bankruptcy

 

The Trouble With Your Social Security

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Social Security call

The caller says your Social Security file is incomplete and without more information, your assets, as well as your benefits, will be frozen.

Pretty terrifying if you depend on Social Security checks.

Only, it’s not true.

The caller isn’t from Social Security.

Social Security can’t freeze your assets.

Social Security doesn’t do business by phone.

But scammers love the phone and they love trusting folks and vulnerable elders.

The caller is a thief

The guy, or the automated voice, on the phone really wants you to hand him your information so he can steal money.

It may be your money he wants to steal, if he gets your banking information.  Or, he wants to steal someone else’s money by pretending to be you.

Scammers also use the IRS cover because the IRS is feared;  just another way to get your attention.

The scammers use the Social Security cover story because Social Security impacts almost every American adult.  And, Social Security is trusted.

Through the magic of hacking, they even display the real Social Security phone number.  But it’s only real on your phone’s caller ID.

The other real thing is the threat to your financial wellbeing.

Only scammers make calls

The “fact” that your first contact about a supposedly dire situation comes by phone is a giveaway that the caller is a scammer.

Real government employees write letters.

They write, and write, and write.

They explain the problem.  They suggest what needs to happen next.  And none of their fixes involve providing critical identifying information over the phone.

They make a record that way that they’ve played by the rules.

When scammers call

Your strategy is simple:

clam up,then

hang up.

Tell them nothing.

But do tell the feds.  You can report the crooks online at   https://oig.ssa.gov/report .

If you continue to be worried about your Social Security account, call the real Social Security at 1-800-772-1213 or online at the SSA’s website.

Keep your personal information personal and private.

More

When the IRS is coming to arrest you

Debt collectors exploit elders via phone

Weapons of a debt collector

 

 

 

$7000 Off The Price Of The Car In Chapter 13

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When the client finally got me a copy of the car finance contract, it saved them $7000 on the price of the car.

They’d tried just giving me the monthly statement.

But that statement on the car loan didn’t show the bombshell that I found when I finally examined the contract:

Included in the loan for the new car was the unpaid balance on their old trade in!

In bankruptcy-speak, that’s negative equity, and negative equity isn’t entitled to payment in full in Chapter 13.

So in our Chapter 13 plan, we can reduce what they  pay for the car by the $7000 of the loan that paid off the trade-in.  It really was worth the effort to find the contract.

Sleuthing in bankruptcy

I know, the amount of paper a diligent bankruptcy lawyer wants from you is daunting.

There’s loan documents, deeds, IRA statements, bank balances, insurance policies, pay stubs, and tax returns.

It can seem overwhelming and sometimes pointless.  I get it.

Some of what we’re gathering is defensive:  to show that the information in your bankruptcy schedules is correct.  After all, disclosure is the price of getting a bankruptcy discharge.

But some of the paper we need supports our offense:  having found the portion of the car loan that related to the trade in rather than the new car, we can slice $7000 off of the debt.

Same thing about getting payroll tax returns.  Not everything a small-business employer owes the IRS is a must-pay.  But we’ve got to get the right paper to figure that out.

Just believe that we are asking for documents for a real reason.  Like reducing the loan by $7000.

Car loans in bankruptcy

The auto side of this story is worth the telling, too.  The ability to manipulate car loans is one of the appealing features of Chapter 13.

Only purchase-money:  After the 2005 bankruptcy amendments, car lenders got a windfall on cars purchased in the three years, more or less, before the bankruptcy.  “Reform” entitled car lenders to more than their collateral was worth. (The lenders had a bigger lobbying budget than consumers when the law was passed).

But the 9th Circuit judges have held that the negative-equity part of a car finance transaction isn’t part of the purchase money loan.  Thus we can strip out the  payoff of the trade-in from the loan balance that must be paid.

Likewise, a debtor can reject gap insurance, maintenance contracts and other add-ons that aren’t part of the value of the car itself.

Interest rate changes:  Regardless of when a car loan was made, Chapter 13 can alter the interest rate that the lender gets on the loan through Chapter 13.  So the 10-15% car loan may pay something closer to 4-5% under the Chapter 13 plan.

Term extended:  A Chapter 13 plan can extend the remaining term of a car loan to match the length of the bankruptcy case.  Spread over more months, the monthly bite of a car loan in your budget can be reduced.

And that’s just a part of the reason that I love Chapter 13.

More

Car loans in Chapter 7

Expert tips on buying a car

Speak fluent bankruptcy

 

Bankruptcy Debtors Entitled To Monthly Mortgage Statements

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monthly mortgage statement

Years of uncertainty and indifference, rooted in the automatic stay and a homeowner’s ongoing obligation on their mortgage after bankruptcy, has ended with a new rule.

Mortgage servicers must now send monthly statements to borrowers in bankruptcy under a new CFPB rule effective April, 2018.   

The earlier version of the rule, adopted in 2014, allowed servicers to send no statements to consumers who had discharged their personal liability in bankruptcy or who had a pending bankruptcy case.

Now the rule creates a duty to render a monthly statement unless

  • the consumer requests the servicer stop sending statements
  • the consumer’s Chapter 13 plan provides for surrender, avoidance of the lien, or doesn’t provide for ongoing payments
  • a court order avoids the mortgage lien
  • a Chapter 7 statement of intentions indicates surrender AND no payment has been made since bankruptcy was filed

Even if an exemption to the duty applies, the consumer can opt in to receiving monthly statements by making a written request.  The request can be made by any borrower on the loan or by their agent, such as their bankruptcy attorney.

And just like RESPA Requests for Information, the servicer can designate an exclusive address to which the request must be made.

Statements tailored for Chapter 13

When a borrower is in Chapter 13, the servicer must modify the monthly statement to show the amount due as only the post petition amount.

The monthly statement must also account for the pre bankruptcy arrearages in a new category on the statement.  Required information on the arrears includes

  • amount received on the prepetition arrearage since the last statement
  • the total of all payments received since the bankruptcy was filed
  • the current balance of the prepetition arrearage

Boon to borrowers

This rule is a huge step forward for borrowers in bankruptcy.  Until this rule, there was a terrible disconnect between the borrower’s intention to continue paying on the mortgage and the servicer’s ability to avoid providing information about what is due.

FRBP 3002.1 spoke to part of the problem when it required servicers to file and serve notices of changes.  But that still left the homeowner without the monthly cue on where and how much to pay on the home loan. 

When mortgage lender changes their tune, it’s war.

The new rule goes a step further in that it requires the monthly statement to show both the state of the loan payments since bankruptcy, but also the progress toward curing any pre bankruptcy default.

Challenge to servicers

For the last 25 years of my bankruptcy practice, servicers have routinely botched the problem of accounting for payments made on mortgage loans in Chapter 13.  They have struggled to impliment a system that properly credits and accounts for payments received after filing on the continuing mortgage along side payments received on the pre bankruptcy arrears.

Even before this rule, servicers can seldom file papers with the bankruptcy court with numbers that are consistent as to the amount the debtor owes.  I’ve seen cases where a proof of claim, an objection to confirmation, and a motion for relief from stay from a lender each states a different number.

The chances for the servicer to screw up have just increased with the implementation of this rule.

I recognize that Chapter 13 presents a challenge, but servicers are in the business of accounting for money.  They need to get it right.  And if compliance makes their job more expensive, they can negotiate an increase in price for their services.

It can no longer be OK to keep borrowers who want to pay in the dark.

Thank you, CFPB.

More for borrowers

The new, improved Request for Information

Decoding your mortgage statement

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Redwood City, CA 94063
Phone: (650) 694-4700

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