Misbehavior and Mistake in Bankruptcy Mortgage Claims

By examining data collected from 1,700 recent Chapter 13 bankruptcy cases, this Article explains how mortgage lenders and servicers often disobey the bankruptcy laws and undermine the ability of families going through bankruptcies to keep their homes.  Professor Katherine Porter begins by explaining what happens in the bankruptcy process. When homeowners file for bankruptcy, the mortgage creditor must file a proof of claim with the court identifying how much is owed.  If homeowners do not pay this amount in full over a specified time period, they will lose their homes.  Along with the proof of claim, creditors are required to provide an itemized statement if their claim includes fees or interest and copies of the promissory note and the mortgage.

Professor Porter shows that mortgage creditors routinely do not follow these laws.  For example, they often do not identify the fees they charged with specificity, making it impossible to determine if the charges were legal.  Furthermore, in more than half of the claims surveyed, creditors lacked some of the required documentation in the proof of claim.  Lack of documentation hampers legal efforts to ensure that the amount asserted as owed is in accordance with the bankruptcy laws, and not in excess of the terms of the debt itself.  Creditors’ failure to provide documentation can manipulate the bankruptcy system to overpay the obligations, harming the debtor and all other creditors.  Despite these violations of the law, Professor Porter explains that creditors are rarely called to task for these behaviors; the costs of doing so are too high and incentives too low in the current system.

Although the data indicate that mortgage servicers are often including illegal fees and charges in the proofs of claim, the charges usually are not objected to by any party to the proceedings.  Even if an objection is made there are typically no negative consequences for failing to follow the law. One solution Professor Porter suggests would be to put some teeth in the rules for lack of compliance.  For example, incomplete claims documentation could be a basis for disallowing a claim altogether.  Another option detailed in the Article would be to require all bankruptcy trustees to file objections when documentation is lacking.  Professor Porter believes that some changes are necessary if the bankruptcy laws are going to continue to help distressed families save their homes.