IBA Compliance Connection

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If a Chapter 7 bankruptcy order of discharge does not itemize which debts have been discharged, should we assume that all debts have been fully discharged? If we received an order of discharge for a debt owed to our bank, can we continue to send monthly statements, escrow analysis, rate or payment change notices, or past due notices? Can we send a notice stating that although the borrower is not personally responsible for the debt, the bank still has a lien and may foreclose or repossess in the absence of the bank receiving payments?

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We do not recommend communicating with a borrower who has filed for bankruptcy or received a discharge order without consulting with bank counsel.

The Bankruptcy Code prohibits creditors from attempting to collect a debt after a borrower has filed for bankruptcy — this is known as an “automatic stay.” A bankruptcy court also may impose similar limitations after a bankruptcy case has been discharged.  Consequently, although your bank may retain a right to enforce its lien, communications with the consumer may be limited by the court’s discharge order or otherwise viewed as an attempt to collect on the underlying debt.

In addition, where you perceive any ambiguity as to whether the mortgage debt was discharged by a discharge order, we recommend that you consult with bank counsel. The treatment of residential mortgages in Chapter 7 and 13 bankruptcy proceedings can become complicated, and it is always advisable to seek the advice of your counsel when working with a mortgagor who has entered into a bankruptcy proceeding.  With this in mind, please be advised that our response to your question should be viewed as general guidance and not as legal advice.

For resources related to our guidance, please see:

  • Bankruptcy Code, 11 USC 362(a)(6) (A petition filing for bankruptcy “operates as a stay, applicable to all entities, of . . . (6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title; . . .”)

  • FDIC Risk Management Manual of Examination Policies — Section 3.2, Loans (“Filing of the bankruptcy petition requires (with limited exceptions) creditors to stop or ‘stay’ further action to collect their claims or enforce their liens or judgements. Actions to accelerate, set off or otherwise collect the debt are prohibited once the petition is filed, as are post-bankruptcy contacts with the obligor.”)