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USFN Briefing Follow-up: Bankruptcy

Posted By USFN, Monday, October 14, 2019
Updated: Thursday, October 10, 2019

by Lesley Bohleber, Esq.

Aldridge Pite, LLP

USFN Member (CA, GA, HI, ID, NY, OR, UT, WA)

During the September USFN Briefing, there was a statement from an audience member that couldn’t be addressed due to time constraints (“I thought we couldn't send out statements on HELOC, without authorization from Bankruptcy Attorney”). Lesley Bohleber from Aldridge Pite, LLP provides an answer below. Downloads from past USFN Briefings and a schedule of upcoming topics may be found on the USFN Briefings webpage.

Mortgage servicers typically have a firm understanding of the required procedures for servicing a conventional loan secured by a mortgage or deed of trust when a borrower files a bankruptcy petition. Conversely, home equity line of credit agreements (“HELOCs”) often pose a host of challenges in bankruptcy proceedings. HELOCs are commonly charged off by the servicer or the lien securing the HELOCs is avoided in the bankruptcy case, if there is a lack of equity to secure the claim.

As of recently, some bankruptcy courts are considering issuing General Orders regarding HELOC payment change notices which would alleviate the servicing burden on these accounts. Federal Rule of Bankruptcy Procedure 3002.1(b) requires a mortgage servicer to file a Notice of Payment Change for a loan secured by a debtor’s principal residence, if the Chapter 13 Plan provides for either the debtor or trustee to remit payment on the loan. However, Rule 3002.1 also allows for a court ordered modification of this payment change notification requirement on claims arising from a HELOC. Proposed General Orders from the Southern District of California and District of Utah would require an annual or biannual notice, respectively, that includes a post-petition payment history. If the proposed General Orders are adopted, it may still be advisable for servicers to send monthly statements to the debtor to keep the debtor apprised of any changes in the monthly payment.

Regulations currently exist regarding periodic mortgage statements for closed-end loans (See 12 CFR § 1026.41), but there is no similar guidance for open-end loans such as HELOCs. However, HELOC servicers may use Section 1026.41 and case law as a guide for determining if they should send a periodic statement to a borrower in bankruptcy.

Unless the debtor or their attorney request a servicer cease sending monthly statements, providing a statement that is purely informational in nature and not coercive or demanding payment is unlikely to be deemed a violation of the automatic stay, regardless of whether the debtor provides a servicer with written authorization to send monthly statements. The same remains true post-discharge. Recently, the United States Court of Appeals for the 11th Circuit affirmed the Bankruptcy Court’s decision finding a post-discharge informational statement on a loan secured by a property surrendered in the Chapter 13 plan did not violate the discharge injunction. See Roth v Nationstar Mortgage., LLC (In re Roth), 935 F3d 1270 (11th Cir 2019).

(Click here for an additional story on the 11th Circuit Court of Appeals’ decision on Roth v Nationstar Mortgage).

In the case of Chapter 13 debtors, whether to send a statement and the contents of the statement on a HELOC should depend on how the claim is treated in the plan. If the plan provides for post-petition payments to be made directly to the servicer by the debtor, informational statements that include the monthly payment amount and due date should be sent to inform the debtor of the monthly payment amount so long as it does not demand payment. If the HELOC claim is paid through the plan with payments disbursed by the Chapter 13 Trustee, servicers should include a disclaimer advising the debtor the statement is for informational purposes only and directing the debtor to tender payments to the trustee rather than the servicer.

If a servicer elects to continue sending statements where a statement of intention or the plan provides for the surrender of the property secured by the HELOC loan, the statement should include a disclaimer instructing the debtor to ignore the statement if they intend to surrender the property securing the loan. In a case where the plan provides for the avoidance of a lien, any statement sent should clearly advise the statement is for informational purposes only and the debtor can ignore the statement if the lien has been avoided. Finally, all mortgage statements for HELOCs in bankruptcy should include instructions for the debtor to opt out of receiving mortgage statements and a toll-free number or address to which the debtor can send a written request. Additional disclosures required by 12 CFR § 1026.41(f) for closed-end loans may be used for HELOCs for further clarification.

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