Why Am I Still Getting Billed By My Mortgage Company After Bankruptcy?

29 Nov Why Am I Still Getting Billed By My Mortgage Company After Bankruptcy?

This is a frequent scenario.  A debtor files for bankruptcy, gets a discharge, and continues to get billing statements from the mortgage company.  These statements and other communications come despite being promised by his or her attorney that all further communications must cease and that any future communications are a violation of the discharge injunction, subjecting the lender to being in contempt of a court order and damages.

 

The problem is, there is a new exception under the new Bankruptcy Laws, that many attorneys are not familiar with, let alone lenders.  Under 11 USC 524(j), an exception to the discharge order exists as follows:

 

(j) Subsection (a)(2) does not operate as an injunction against an act by a creditor that is the holder of a secured claim, if–

(1) such creditor retains a security interest in real property that is the principal residence of the debtor;

(2) such act is in the ordinary course of business between the creditor and the debtor; and

(3) such act is limited to seeking or obtaining periodic payments associated with a valid security interest in lieu of pursuit of in rem relief to enforce the lien.

 

 

While many Lenders are fairly ignorant of the new laws, this new exception redeems that ignorance provided the communications meet a new three part test: 1) the communications concern the principal residence, 2) the communications are in the ordinary course of business, and 3) the communications simply seek ordinary payments in lieu of foreclosure.  

 

Accordingly, lenders are not in violation of the Discharge Injunction of the Bankruptcy Code where debtors remain in their residence and the lender is simply attempting to collect monthly payments in the ordinary course of business, in lieu of foreclosure.  Literally, this means that these lenders may contact the debtor by phone, mail, etc. to collect money for the loan despite filing bk and without being in violation of the discharge. In fact, a technical reading of the statute seems to suggest that the lender could even sue the debtor in small claims court for each payment missed, notwithstanding the discharge, although it may be tough to argue that lawsuits are in the ordinary course of business between the debtor and creditor.

 

As such, new 524j has pretty much killed most discharge violations for these secured creditors. Nevertheless, if the debtor has surrendered the residence in the bankruptcy and vacated the property, then it would appear that the property is no longer the principal residence thus defeating the first requirement under (j)(1).  Indeed, this was our argument against Countrywide wherein the Court awarded our client over $55,000.00 in damages for such conduct.

 

 

Likewise, this new provision does not apply to rental or investment property.  Finally, while this limited exception may apply to many lenders post discharge, there is no similar provision in the new Bankruptcy Code which allows such communications after case commencement and prior to discharge. Thus, such billing statements could be viewed as automatic stay violations under 11 USC 362 while the bankruptcy is pending, regardless of the new laws.

 

As always, if you have any questions concerning communications you are receiving from your creditors after filing your bankruptcy case, please see your attorney immediately.  It could very well be that such creditors are in violation of the Bankruptcy Code entitling you to seek damages for such collection abuses.

 

Written by Michael G. Doan

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