Families in financial distress are under great stress. The telephone rings with repeated calls from debt collectors, each paycheck is at risk of garnishment, and the next knock on the door could be a process server or a repo agent. For many families, the greatest fear is losing their home to foreclosure. A home is not only most families’ largest asset, but also a tangible marker of their financial aspirations and middle class status. A threatened or pending foreclosure can signal the end of a family’s ability to struggle against financial collapse and an unrecoverable tumble down the socioeconomic ladder.
Bankruptcy offers these families one last chance to save their homes. A bankruptcy filing halts a pending foreclosure and gives families the right under federal law to cure any defaults on mortgage loans over a period of years. The bankruptcy system offers refuge from the vagaries of state law foreclosure, substituting the protections of a federal court system and uniform legal rules to ensure that these families get one final opportunity to preserve their homes.
But this protection comes at a cost. Mortgage companies file proofs of claim with the bankruptcy court for the amount of the mortgage debt. In turn, bankrupt debtors must pay these claims or lose their homes. The balance between the family and the mortgage lender is clearly spelled out in the bankruptcy laws, specifying the manner in which the amount owed is to be established and obligating both the homeowner and the mortgage company to disclose information accurately.
This claims process is well-established and, until now, uncontroversial. Homeowners backed up by lawyers, policymakers, and news reporters assume that bankruptcy functions according to the official rules and, by following these rules, that it provides a realistic opportunity for families to save their homes. The data revealed in this Article suggest, however, that home mortgage lenders often disobey the law and overreach in calculating the mortgage obligations of consumers. Such actions can cripple a family’s efforts to save its home and undermine policies to promote sustainable homeownership.
This Article examines the actual behavior of mortgage companies in the consumer bankruptcy system. Using original data from 1700 recent Chapter 13 bankruptcy cases, I conclude that mortgagees’ behavior significantly threatens bankruptcy’s potential to help families save their homes. Despite unambiguous federal rules designed to protect homeowners and to ensure the integrity of the bankruptcy process, mortgage companies frequently fail to comply with the laws that governs bankruptcy claims. A majority of mortgage companies’ proofs of claim lack the required documentation necessary to establish a valid debt.
Fees and charges on bankruptcy claims often are identified poorly and sometimes do not appear to be reasonable. Each year, mortgage creditors assert that bankrupt families owe them an aggregate of at least one billion dollars more than the families themselves believe are their outstanding mortgage debts. Although infractions are frequent and irregularities are sometimes egregious, the bankruptcy system routinely processes mortgage claims that are not lawful. Far from serving as a significant check against mistake or misbehavior, the bankruptcy system routinely processes mortgage claims that clearly are not lawful.
Contents
INTRODUCTION
I. STATEMENT OF PROBLEM
- A. The Structure and Function of Mortgage Servicing
B. Mortgage Servicing in Bankruptcy Cases
C. Bankruptcy Litigation of Mortgage Claims
II. METHODOLOGY
III. FINDINGS
- A. Required Documentation for Mortgage Claims
B. Default Fees in Mortgage Claims
C. Discrepancies between Debtors’ Schedules and Mortgagees’ Claims
D. Claims Objections
IV. IMPLICATIONS
- A. Proof of Claim Process
B. Bankruptcy as a Home-saving Device
C. Sustainable Homeownership Policy
CONCLUSION
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