Saving a home from foreclosure is one of those most common reasons for Michigan homeowners to file a Chapter 13 bankruptcy case.
It is a highly effective means of stopping a foreclosure and sheriff’s sale of your home—so long as it is filed before the sheriff sale!
However, even when the Chapter 13 process is successfully completed, your mortgage servicers’ accounting practices will still require that you maintain vigilance.
Chapter 13 Bankruptcy and Mortgage Foreclosure
Chapter 13 bankruptcy is a “reorganization” bankruptcy in which debtors repay a portion of their debt through a 3-5-year payment plan overseen by the US Bankruptcy Court.
A Chapter 13 is that it stops all collection attempts—including foreclosure processes—from the moment it is filed. A Chapter 7 bankruptcy does the same thing, however.
The great advantage of a Chapter 13 over Chapter 7 (or any non-bankruptcy option) is that, instead of simply discharging debt in exchange for the (possible) liquidation of assets, it allows you to retain your property and prioritize the payment of certain debts over other debts.
Medical debt, credit card debt, rental arrearages, personal debts and contract balances owed, as well as other unsecured debts, are paid last in priority.
Ongoing mortgage payments and mortgages arrearages owed may be paid first in priority (other than attorney’s fees and the Chapter 13 Trustee’s fees), over those any virtually any other sort of debt.
Thus, when you make a monthly Chapter 13 Plan payment during that 3-5-year bankruptcy process, the first debt that will be paid is your mortgage debt.
Unsecured debts are only paid whatever is left over, at the end of the Chapter 13 process. Whatever those creditors receive is all that they receive, with the balance owed “on paper” totally discharged just as in a Chapter 7.
Meanwhile, having sent every required Chapter 13 Plan payment in the proper amount and on schedule to your Chapter 13 Trustee (whose job is to take your payments and remit the funds out to your creditors in the right priority order), you have also made every ongoing monthly mortgage payment.
You have also cured any mortgage payment arrearage that you had when you filed your Chapter 13 bankruptcy.
Congratulations. The end of the Chapter 13 process, for Michigan homeowners, means the end, also, of any foreclosure process that had begun prior to the filing of the bankruptcy.
If you have the income necessary to make the Plan payments that your particular situation requires, the Chapter 13 bankruptcy process is the most effective means of resolving an imminent home foreclosure in American law.
It requires no negotiation with your mortgage servicer. It is a legal benefit to which you are simply entitled under Federal law.
So what could go wrong?
Mortgage Fees and Michigan Chapter 13 Bankruptcy
There are 2 situations in which post-bankruptcy mortgage fees can continue to plague you.
The first situation is in the instance that you do not, in fact, successfully complete your Chapter 13 bankruptcy and do not receive a bankruptcy discharge.
A great many Chapter 13 bankruptcies do not reach the point of discharge for a variety of reasons. A loss of employment or drop in income for the debtor filing the case result in a lost ability to make the Chapter 13 Plan payments as required. The divorce of a jointly filing married couple can up-end a Chapter 13 process. Serious illness or health problems can affect both the finances and resolve of a Chapter 13 debtor. The failure of a debtor to comply with other requirements of the Chapter 13 process (such as the need, in Detroit cases, to turn over tax returns and Federal tax refunds each year) can also result in the dismissal of a Chapter 13 case.
There are as many reasons for a Chapter 13 process to fail a there are different people filing Chapter 13 processes.
Some Chapter 13 bankruptcies are also voluntarily dismissed by the debtors who filed them for, also, a great many reasons.
Whatever the reason, if a Chapter 13 case through which a mortgage and/or mortgage arrears are being paid, there can be consequences.
It is important, first, to understand, that, when a Chapter 13 bankruptcy is filed, the mortgage servicer accepting the payments on the mortgage from the filing homeowner opens a second set of accounting books for the payments and fees charged during the bankruptcy and the funds received along the way from the Chapter 13 Trustee.
All the while, the servicer will also continue in the background to maintain the accounting for the mortgage contract as if a bankruptcy had never been filed.
This “dual-track” accounting system means that there is always the possibility that a payment made through the Chapter 13 Plan is recorded on the “bankruptcy ledger” by the servicer—but not on the other one.
Likewise, a fee charged by the servicer as part of the bankruptcy may be charged and disclosed in the servicer’s bankruptcy pleadings. This fee may not be recorded as paid in the servicer’s non-bankruptcy accounting books even if it is paid through the Chapter 13 Plan.
This dual-track accounting is a system rife with error, even though the Federal Bankruptcy Rules require that mortgage servicers disclose all bankruptcy-related fees within 6 months of the fee being incurred.
When a Chapter 13 case is dismissed or closed without discharge, the books are often closed without proper reconciliation or auditing.
The situation is even more complicated in the extremely common instance that the mortgage holder transfers servicing responsibilities to another servicer immediately after the case is filed, during the case, or after the case is closed.
When the case is closed without discharge, there is no court order stating that the mortgage is current as of the date of discharge as is the case when the Chapter 13 bankruptcy case completes successfully.
This order is powerful ammunition for the homeowner’s later use in arguing about mortgage fees charged and perhaps not properly disclosed.
The second situation is, obviously, when the Chapter 13 case is successfully completed.
Even in this instance, in which the court has ordered that the mortgage is current as of the date of discharge, all of the above issue can still come back to haunt the now-discharged homeowner for years to come.
The form that that “haunting” will take is the inclusion on your monthly mortgage statement of fees and charges that may be legitimate and owed—or may not be.
It will be very difficult for you, often, to determine which is the case.
The commonly used Fannie Mae-Freddie Mac standard mortgage form utilized by virtually all mortgage originators in the United States generally will require to you to reimburse legal expenses incurred by your mortgage servicer in certain situations.
The filing of a Chapter 13 bankruptcy may or may not be one of those situations. This will be very specific to your pre-filing payment history, your mortgage contract, the case-law in the Federal judicial district in which your case is filed—and the compliance of your mortgage servicer to the requirements of the Federal Bankruptcy Rules of Procedure.
Mortgage Fees After Chapter 13 Bankruptcy: The Bottom Line
The bottom line is that, if, after your Chapter 13 is ended, you receive a mortgage statement with fees that you do not understand itemized upon it, you need to contact your Michigan bankruptcy lawyer to discuss the charge.
Attorney Walter Metzen has successfully represented thousands of Detroit-area Chapter 13 bankruptcy clients for over 28 years. A Board Certified Bankruptcy Expert, Attorney Metzen has the experience and expertise to defend you from sloppy or even illegal mortgage servicing fees both during and after your Chapter 13 bankruptcy.
If you are interested in filing a Chapter 13 bankruptcy, contact us now to schedule your free initial consultation.