This website does not provide legal advice.  It is for informational purposes only. Please do not act or refrain from acting based on anything you read on this site. The information contained in this web site, article or link may be outdated, incorrect or not applicable; it is your obligation to confirm the accuracy. Using this site or communicating with Law Office of D.L. Drain, or any agent/employee of our firm, through this site does not form an attorney/client relationship. This site is legal advertising. Please review the full disclaimer for more information.

It is very important that you obtain legal advice from an experienced attorney regarding your particular situation. Consultation before you take action will certainly cost you less than it will cost to fix your unintentional errors.

MORTGAGE COMPANY & SERVICERS IN BANKRUPTCY

IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO.  WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.

Not all bankruptcy “core” proceedings are created equal: a limitation on state law lender liability claims in bankruptcy court after Stern v. Marshall Katten Muchin Rosenman LLP
The scenario has become all too familiar in recent years: a borrower defaults on a loan and, when the lender pursues the loan collateral through foreclosure or other proceedings, the borrower files for bankruptcy protection.

In re Kenny G. Enterprises  16-55007 (9th Cir 7/26/2017)  Kenneth Gharib refused to comply with Bankruptcy Court order to turn over $1,420,000 belonging to a chapter 7 estate.  The judge imposed sanctions for the contempt: civil contempt sanctions of $1,420,000, $1,000 a day until he complied, plus incarceration until he complied.  The District Court of California affirmed the order, except the $1,000 a day. The 9th Circuit reverses on the issue of daily sanctions, finding that such daily sanction is permitted if it is “properly coercive” to comply with the turnover order, but not if it becomes punitive.

In the face of a § 542 violation the bankruptcy court may invoke its contempt power under § 105, which allows the court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” 11 U.S.C . § 105(a)  Such sanctions include incarceration for more than two years

Mortgage servicers are plagued by their nebulous relationships with the borrowers who discharge their personal liability in bankruptcy. Issues arise when the borrower whose debt has been discharged continues to engage with the mortgage servicer. These activities include making monthly payments and requesting and participating in loss mitigation. There are few, if any, bright line rules regarding this common scenario. Instead, courts generally employ an “I know it when I see it” approach to evaluate whether such activity violates the discharge injunction and/or the Fair Debt Collection Practices Act. 

The following is a link to four posts by attorneys at Bradley Arant Boult Cummings, LLP.

Part 1.  Mortgage servicers are plagued by their nebulous relationships with the borrowers who discharge their personal liability in bankruptcy. Issues arise when the borrower whose debt has been discharged continues to engage with the mortgage servicer. These activities include making monthly payments and requesting and participating in loss mitigation. There are few, if any, bright line rules regarding this common scenario. Instead, courts generally employ an “I know it when I see it” approach to evaluate whether such activity violates the discharge injunction and/or the Fair Debt Collection Practices Act.

Part II. The only way to fully eliminate the risk of violating the bankruptcy discharge injunction is to cease all communications to borrowers who received a discharge of the debt. However, this drastic change in practice is not realistic. First, the discharge only eliminates the borrower’s personal liability – the servicer’s lien, and its right to foreclose on the collateral, still exists. A discharge of this personal liability does not preclude servicers from communicating information to the borrower that may be relevant to possible foreclosure or how to avoid foreclosure, and does not absolve the servicer of any existing requirement to send such notices.

Part III. This part will discuss modifying a borrower’s loan after a discharge.  Discharge of personal liability does not preclude the borrower from making payments voluntarily. Neither does that discharge preclude the delinquent borrower from seeking a loan modification. Some practitioners insist that post-discharge loans cannot be modified because there is no note, only a security instrument, and therefore there is no loan to modify. This relationship can be more accurately described as one where the borrower must pay to remain in the house, and where the note has become non-recourse as to the borrower. The enforceability of that relationship is now anchored only in the property itself. The Department of the Treasury, through its directive regarding HAMP modifications, has explicitly said that this relationship can be modified. Fannie Mae and Freddie Mac have, in turn, suggested language to be used in agreements with these borrowers. All three of those entities have encouraged a servicer that modifies a loan after the borrower has discharged his personal liability to use a disclaimer that all payments are voluntary, and an acknowledgement that the servicer cannot seek to collect against the borrower personally.