Another Reason to Object to Claims in a Chapter 13 Case

04 Oct Another Reason to Object to Claims in a Chapter 13 Case

Karen Oakes’ post on reasons to object to unsecured claims in Chapter 13 cases reminded me of a related issue–the importance of examining and, when appropriate, objecting to secured proofs of claim in Chapter 13 cases.

In Chapter 13 cases where mortgage payments had become delinquent before filing, the typical Chapter 13 Plan specifies that the debtor (or the trustee in some districts) will resume making the regular mortgage payments going forward, and the trustee will pay the mortgage creditor a monthly payment toward catching up the back payments. The Bankruptcy Code specifies that the lender must apply the payments they receive as the plan directs. Mortgage servicers, however, don’t want to do that. It is easier for them to apply any payment they receive to the oldest payment due. For example, if the debtor was behind on mortgage payments when a Chapter 13 case was filed, and resumes making regular mortgage payments this month, instead of posting that payment as the October 2007 payment, it might be posted to the May 2007 payment. The problems with that approach are many. Obviously, posting the payment that way generates a late fee for October, to which the lender is not entitled. Even if the lender backs out the late fee, interest continues to accrue, and other fees may be assessed. In addition, if the lender posts the trustee payments the same way, they may not be posted timely, because all or a portion of such payments may be placed in suspense, if the amount of the payment is not enough to make up a full payment at one time. The practice also leads to confusing statements and payment histories, making it difficult (and sometimes well nigh impossible) to determine whether payments have been made in a timely fashion. These issues are becoming more prevalent and lead to more and more litigation during the Chapter 13 case as well as after its conclusion.

Recently I was reviewing claims in a Chapter 13 case because my client was receiving statements from the mortgage lender that didn’t make sense. In reviewing the lender’s claim, I ran across some language inserted in the lender’s Proof of Claim that basically said that the lender didn’t have to comply with the law in posting payments and charging fees to the account. The lender had not served me with a copy of the claim, or otherwise notified me of this contention. Nevertheless, I feel sure that should questions arise about how payments were applied, the lender would argue that the debtor was on notice of how the lender proposed to apply the payments.

I don’t know whether a court would find such language changes the lender’s responsibility under the law, and it is probably not intended to do that. But it might be offered as evidence of the lender’s good faith, in order to avoid getting popped with a punitive damage award. It’s just one more reason that debtors (and their counsel), trustees, and the U.S. Trustees’ offices should review all claims, and file objections to them when appropriate.

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