Point of View: Dealing with Post-Petition Delinquency Issues
Mr. Moss is an attorney with Wilson & Associates, a creditors' rights law firm.
Often debtors who file a Chapter 13 bankruptcy do so mainly to avoid losing their home to foreclosure. In an ideal case, the debtor will file the bankruptcy and propose a plan that cures the arrears that have developed in their mortgage loan. The plan will also require them to maintain the continuing "post-petition" mortgage payments while the mortgage arrears, and their other debts, are dealt with during the term of the plan. Typically the post-petition payments will also be made by the Chapter 13 trustee as part of the plan. Once the plan is confirmed, the debtor must make his payments as required over the life of the plan, usually three to five years. When his plan is complete, his pre-petition mortgage arrears, as stated in the proof of claim filed by the mortgage company, will have been paid back in full. And since the post-petition payments will have been maintained by the trustee, the debtor should come out of his case with a current mortgage.
However, it is often the case that "post-petition" deficits occur on the account for varying reasons. Sometimes the deficiency develops because the loan has an adjustable rate and the payment went up, but for whatever reason, the trustee's office did not adjust the payment accordingly. They may have not been informed of the increase, or a notification was sent, but for some reason, it did not result in an adjustment in the payment. More often, these deficiencies are the result of escrow expenditures. Often the escrow expenses increase and thus the payment must increase to cover the required expenditures. But as with the adjustable-rate scenario above, the payment increases often don't result in the trustee making the adjustment for whatever reason. Or, the loan may not be escrowed or adjustable, but the mortgage company may have received notice of delinquent taxes or lack of insurance, and they paid the taxes to avoid the risk of a tax sale, or force-placed insurance to avoid the obvious risks involved with not having insurance on the house. Debtors are typically sent notice of the above-described developments, but do not forward this information to their attorney or the trustee because they do not think it is necessary, or they believe their plan will be adjusted without them having to do anything, or they simply do not pay attention. Another problem is that mortgage companies feel caught in a Catch 22. They worry about being sued for stay violations for contacting debtors about money owed on their accounts. But they also have an obligation to keep the debtor informed about the status of the loan. This tightrope can understandably cause mortgage companies to be less assertive in their efforts to inform debtors than they would be outside the bankruptcy context.
As a result of this frequent occurrence, many trustees around the country now file some kind of motion to declare mortgages current toward the end of the debtor's plan. This motion will state something to the effect that the pre-petition arrears claim of the mortgage company has been paid in full, and that the post-petition mortgage payments were maintained by the trustee, and therefore the court should enter an order declaring that the mortgage is current. If the mortgage company is alert enough, they can file a response to such a motion if the account is in fact not current, and some agreement can usually be made to correct the problem. If the deficiency to be cured is a large one, often it is agreed that there is a deficiency, but that the case will complete without the deficiency being paid. An agreement for paying back the deficiency post-bankruptcy will be negotiated, and an order to that effect will be entered. If the case is not approaching the statutory time limits, it may be agreed that the deficiency will simply be added to the plan and caught up prior to plan completion.
Another possibility that may occur is that the trustee's motion is unopposed and an order is entered declaring the mortgage current, when in fact the mortgage is not current, but the mortgage company did not respond for some reason. If this occurs, the mortgage company may move to have the order set aside if the can find appropriate grounds for such a request, such as inadequate notice. If this can be done before the case has completed and discharged, the parties should be able to come to some arrangement as described above. But if the case has already completed and discharged, it is more complicated because the option of extending the plan to cure the deficiency is not available. And debtors are very unwilling to reenter the bankruptcy with its automatic deductions from their paycheck after just having that deduction removed. Also there is often a large sum of money on hand in a debtor's plan when the case is about to complete. That money is often used to fix post-petition mortgage deficiencies. But when the case is over, that money is often refunded to the debtor and may have been quickly spent on something else. In this case debtor's attorneys are more likely to insist that the mortgage company simply abide by the court's order.