We recommend that you review your home equity statements to determine whether they may be construed as attempting to collect on the outstanding debt. If they demand payment in any way, even if it is voluntary repayment, we recommend that you do not send the statements. We also strongly recommend that you seek the advice of counsel on whenever working with a borrower who has filed for bankruptcy.
The Bankruptcy Code prohibits a creditor from engaging in any act that is an attempt to collect on a debt that was in existence before the beginning of the bankruptcy case once the creditor has received notice of an automatic stay. 11 USC 362(a)(6). The Federal Court of Appeals for the Seventh Circuit has said that the purpose of the automatic stay is to “benefit a debtor by preventing harassment and frustration of rehabilitation efforts through pursuit by creditors in individual actions.” Matthews v. Rosene, 739 F.2d 249, 251 (7th Cir. 1984).
The Consumer Financial Protection Bureau (CFPB) has recently exempted mortgage servicers of residential mortgage loans from the requirement to send a periodic statement for borrowers who have filed for bankruptcy. 12 CFR 1026.41(e)(5). Although this exemption does not apply to home equity lines of credit, we believe the CFPB supplemental guidance in the Federal Register is relevant. It states that the Bankruptcy Code does not prevent a servicer from sending a consumer a statement on the status of the mortgage loan, but it also goes on to state that whether a periodic statement may violate an automatic stay is a fact-specific inquiry and “can vary depending on the Chapter of the Bankruptcy Code at issue, and the intention of the debtor to retain the property, and the frequency and detailed contents of the periodic statement provided.” 78 Fed. Reg. 62993, 6300, 62997 (October 23, 2013).
Courts are split as to the type of communications that might violate the automatic stay.
The Federal Court of Appeals for the Seventh Circuit has held that a letter sent to the debtor’s attorney asking the debtor to reaffirm the debt did not violate the automatic stay provisions of the Bankruptcy Code. In Re Duke, 79 F.3d 43, 46 (7th Cir. 1996).
In a bankruptcy court in Florida, the court stated that creditors can provide information to debtors during the bankruptcy case, but “the statements should not request payment or enclose a payment coupon or a return envelope. The statement can do nothing more than provide necessary information.” In Re Draper, 237 B.R. 502, 502 (M.D. Fla. 1999).
A bankruptcy court in Ohio has held that an “information account statement” which included a past and current balance, and had a “voluntary payment coupon” attached, violated the automatic stay. In Re Cousins, 404 B.R. 281, 284 (S.D. Ohio 2009). The court stated that the information about the current and past balance had an informational purpose, but the voluntary payment coupon was obviously directed at getting the borrower to pay, even though there was a disclaimer stating that the document was for “informational purposes only.” Id. at 287. The court went on to say that the payment coupon constituted pressure on the debtor and violated both the language and the purpose of the automatic stay. Id. at 290.
A court in Hawaii found that as soon as after the debtor converted his case to Chapter 7 bankruptcy, and stated his intention to surrender the mortgaged property, the debtor “no longer needed to know the status of the mortgage payments.” In Re Connor, 366 B.R. 133, 137-38 (Haw. 2007). “[T]he only purpose for sending the monthly statements after that point was to induce the debtor to make payments.” Id.
As the above cases illustrate, sending home equity statements very well might be viewed as an attempt to collect on the home equity line of credit, as the statements would include an account balance that is outstanding. See 12 CFR 1026.7(a)(1). Also note that the automatic stay remains in effect until the debtor’s property is released from the estate, the bankruptcy case is dismissed, the debtor obtains or is denied a discharge, or the bankruptcy court approves a creditor’s request for termination of the stay. See FDIC Risk Management Manual of Examination Policies — Section 3.2, Loans.
In sum, this is a very sensitive area prone to challenges by the debtor. We recommend that you analyze your statement to ensure that there are no provisions in it that might be construed to attempt to collect a payment. Moreover, we advise that you seek the advice of counsel with respect to working with any borrower that has filed for bankruptcy.