You might be able to pay off what you are behind on a mortgage over a three to five year period, but not all at once like your mortgage servicer is demanding. Chapter 13 provides the powerful right to force a payment plan on a mortgage lender who wants to foreclose. Once the decision to file Chapter 13 is made, the question arises: what must you pay back in your plan to make the mortgage lender whole. First, Section 506(b) of the Bankruptcy Code does not permit creditors with collateral worth less than their claims (i.e. “undersecured” creditors) to collect interest or fees from the bankruptcy estate. However, Section 1322(e) of the Bankruptcy Code provides:
Notwithstanding subsection (b)(2) of this section and sections 506(b) and 1325(a)(5) of this title, if it is proposed in a plan to cure a default, the amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable non-bankruptcy law.
Although this language makes it rather clear that Section 1322(e) trumps the more general prohibition of Section 506(b), the matter was a matter of some minor controversy for some time. In 2010, however, the Sixth Circuit held in Deutsche Bank Nat’l Trust Co. v. Tucker that even a undersecured creditor could impose legal fees and other charges as part of what was required to cure the arrearage in a plan.
Here in Massachusetts, Judge Feeney reached the same conclusion in 2009 (in re Regan).
That isn’t the whole story, however. Fees and charges in a proof of claim still must be allowable under state law and the underlying agreement. In Massachusetts, the largest law firm handling mortgage claims in bankruptcy as alleged in a class action lawsuit to have over billed consumers by charging amount that, among other things, their clients did not actually pay out as legal fees. In other words, the sought reimbursement for amounts in fees not actually expended. The case was Pettway v. Harmon Law Offices et al. and it settled some time after class certification was granted.
Legal fees also must be reasonable. Experienced local debtor attorneys will know, when examining a mortgagee’s proof of claim, whether something seems off. If the fee claim is out of proportion to the usual amounts sought under similar circumstances, there could be a viable challenge to the amount of the fee claim in the claim objection process. If the mortgagee’s attorney is seeking an amount not allowed by the mortgage or state law and the firm is a debt collector as defined by federal law, the consumer will also have an FDCPA claim.