Chapter 13 bankruptcy and mortgage escrow accounts rarely mesh well.
That being the case, if you are a homeowner, it wise to obtain some key documentation from your mortgage servicer before filing a Chapter 7 or Chapter 13 bankruptcy case.
Especially in a Chapter 13 bankruptcy, since a debt reorganization process that can be 5 years long, it is essential to have a good starting knowledge base.
Requesting certain documents from your mortgage company prior to the filing of your Chapter 13 bankruptcy will allow you and your bankruptcy attorney to review everything filed by your mortgage servicer with a knowing eye.
Having the right information on hand at the initiation of your Chapter 13 process and obtaining updated records throughout your case will assist in verifying the accuracy of the balances appearing on the mortgage proofs of claim, notices of payment changes, motions for relief from the automatic stay, and even, at the end of the process, responses to the Chapter 13 Trustee’s Notice of Final Cure Payment.
Max Gardner taught me these concepts and we implement these procedures to protect homeowners during a Chapter 13 bankruptcy case.
With regard to your mortgage escrow account, having accurate information on hand from the start will be well worth the trouble to obtain it.
Why, and what is an escrow account?
First, an escrow account is like a savings account maintained on your behalf by your mortgage servicer.
That savings account is established when the mortgage is first originated or when it is refinanced.
It is used by the servicer to ensure that that your property taxes and homeowners insurance is paid. The maintenance of these expenses is generally required by your mortgage contract because they are necessary to preserve the value of the collateral securing the loan.
The collateral is, of course, the home.
The escrow account is governed by the Real Estate Settlement and Procedures Act (“RESPA”). The mortgage contract and other documents set out the terms of how the escrow account is to be treated.
RESPA contains the rules that tell a mortgage company how it is supposed to treat your money and what it is supposed to do with it.
One of the primary RESPA requirements of mortgage servicers is that, every year, they must calculate an analysis of your escrow account to ensure that it is both accurate and properly—but not overly—funded.
However, what happens when you file a Chapter 13 bankruptcy case?
A Chapter 13 bankruptcy is intended to restructure or reorganize your debt.
Chapter 13 allows a homeowner who has fallen behind in mortgage payments to catch those payments up over 3-5 years along with the payment of ongoing monthly mortgage payments. These secured mortgage payments are made in priority over unsecured debt, such as credit card or medical bills.
In fact, the ability to do this is one of those most common reasons why people elect to file Chapter 13 bankruptcy.
Upon filing of the Chapter 13 bankruptcy case, the mortgage servicer is required to perform a new escrow analysis as of that date.
If your escrow account is, on that date, carrying a deficiency balance, the servicer must include that as an overall mortgage arrearage on the proof of claim form that is filed with the court attesting to the balance of its secured claim.
Mortgage servicers commonly make errors with this initial Chapter 13 escrow calculation.
This creates a host of problems down the line if not detected. If left alone without objection, the next escrow calculation a year later will be automatically incorrect as it will be premised upon the first. And so will the one after that, and so on.
When the mortgage is transferred or sold, or when the servicing obligation is transferred to a new company by the holder of the mortgage, the problem is compounded as those possible already incorrect records may or may not be accurately transferred to the new company also.
For any homeowner, a mortgage servicing transfer has likely happened more than once. For a homeowner in Chapter 13, this can happen within a few days of the filing of the bankruptcy case, during the case, or even at the conclusion of the case.
The entity that files the proof of claim just a few weeks after the Chapter 13 is filed is not the same entity to whom the homeowner-debtor mailed the mortgage payment just a month prior.
Often, several years may slide by with either inaccurate notices of mortgage payment increase or decrease being filed with the Bankruptcy Court—or with no notice at all being filed.
When this occurs, at the end of the bankruptcy case, 5 years may have elapsed with only 1 or 2 escrow analyses having been performed.
The case ends and is closed by the court—and, then, the mortgage servicer contacts the homeowner to demand payment for a sizeable escrow deficiency that no one knew existed.
Fortunately, there are tools available to protect consumers when this happens.
In particular, Federal Bankruptcy Rule 3002.1 requires mortgage servicers and holders to file notices of payment increases, decreases, or the application of other fees and charges, with the Bankruptcy Court within very specific timeframes.
Mortgage creditors who do not comply are not only liable to have those fees disallowed, they are also can be held liable for sanctions and payment of the debtor’s attorney’s fees for actions brought to enforce the Rule.
Thus, if you are at the end or past the end of a Chapter 13 proceeding and you receive notice of a large escrow imbalance from your mortgage servicer, this could be a violation not only of RESPA but also the Bankruptcy Code and the Rules of Bankruptcy Procedure.
If you have questions regarding your escrow account and your Chapter 13 bankruptcy, or if you are an Alabama homeowner considering filing for Chapter 7 or Chapter 13 bankruptcy, contact us to discuss your options.