Topic: Bankruptcy
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We are a small servicer, but we voluntarily provide periodic statements to mortgage borrowers, as required for large servicers. When the CFPB’s amendments to the servicing rules go into effect in April of 2018, would we incur any implied liability for sending the modified periodic notices for borrowers in bankruptcies? Could we instead discontinue sending periodic notices altogether to customers who have filed for bankruptcy and have not reaffirmed the debt?
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No, we do not believe that you would incur any liability for sending the modified periodic statements for consumers in bankruptcy under the CFPB’s amended mortgage servicing rules. The CFPB designed its modified periodic statements to comply with the Bankruptcy Code’s prohibition against contacting borrowers who have filed for bankruptcy and are subject to the…
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We recently discovered a small number of loans that have been incorrectly reported to the credit bureaus. Several years ago, these customers went through bankruptcy and then reaffirmed the debts with our bank; however, the bankruptcy and reaffirmation never were reported to the credit bureaus. I believe we must report these as reaffirmed accounts per our contract with the credit bureaus. Are we subjecting ourselves to any additional legal, financial or other risks?
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We believe there could be risk for your bank if it fails to correctly report the missing information. The Fair Credit Reporting Act (FCRA) requires furnishers of consumer information to promptly correct any erroneous information. While the FCRA does exclude certain bankruptcy information from consumer credit reports, the responsibility to remove excluded bankruptcy information falls…
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A customer applied to refinance her mortgage. She told us that she filed for bankruptcy in 2009. Before her bankruptcy, she had a second mortgage on her home. The customer does not remember what happened with her second mortgage following her bankruptcy, but she is not currently making any payments on it, and no second mortgage appears on her credit report. Consequently, we think this debt may have been discharged in the bankruptcy. However, we did obtain a financing statement from the second mortgage lender, which states that there is an outstanding loan in the amount of $28,000 secured by a lien on the property (again, she is not making any payments on this loan, and it does not appear in the credit report). We plan to consider the lien as part of our underwriting, but can we also consider the $28,000 debt?
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Generally speaking, a lender may consider that a debt was discharged in bankruptcy when underwriting a new loan, provided the debt was discharged within the time period in which it is allowed to appear on a credit report. A consumer’s bankruptcy information — including certain details about discharged debts — may appear on a credit…
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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…
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If a borrower files a Chapter 7 bankruptcy and reaffirms their loan debt with us, should we report subsequent loan payments to the credit bureaus? If the borrower continues to pay without reaffirmation, should we report only that the loan was discharged in bankruptcy, but not report the payments made?
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Yes, if you receive notice that the debt has been discharged in bankruptcy, we believe you should report it so that the consumer reporting agency can accurately note the status of the debt (e.g., discharged, voluntarily repaid, etc.). It also would make sense to report a reaffirmation and to report loan payments that the borrower…
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If we believe that a house securing a mortgage has been abandoned, and the borrower has filed for bankruptcy, do we have the right to enter the property and winterize it? Can we request permission from the borrower to enter the property, even if the automatic stay applies?
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We do not recommend contacting the customer or entering the property. The Bankruptcy Code’s prohibition on actions to collect a debt after a borrower has filed for bankruptcy (the “automatic stay”) applies to “any act to exercise control” over the property. Requesting permission to enter the property and entering the property to make repairs or…
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If a mortgage borrower verbally notifies us about filing for bankruptcy, but we have not received notice of the bankruptcy, how long must we wait before making contact with the customer or filing a lawsuit?
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We do not recommend making any contact with or filing a lawsuit against a customer who has verbally notified you about a bankruptcy filing, without consulting your bank counsel. The Bankruptcy Code’s prohibition on actions to collect a debt after a borrower has filed for bankruptcy —known as the “automatic stay” — begins to apply…
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We recently received notice that a consumer mortgage loan borrower is filing for Chapter 7 bankruptcy. Should we continue sending loan notices to the borrower? What about other communications, such as deposit account statements?
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We do not recommend sending any loan notices to a borrower who has filed for bankruptcy 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 the “automatic stay.” A bankruptcy court also may impose similar limitations…
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Three years ago, a small business customer purchased a cashier’s check in the amount of $5,500 payable to a car dealer for the purchase of a car. The car sale fell through and the cashier’s check was never presented to the dealer. Subsequently, the company went through bankruptcy and closed its account with us. Now the president of the company would like us to reissue the check to her personally. Can we do that? I don’t want any trouble with the bankruptcy court.
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We believe that you may reissue the cashier’s check, but only if the request comes from the company’s bankruptcy trustee or a successor-in-interest to the trustee. The Illinois Supreme Court has recognized that the remitter of a cashier’s check remains the owner of the check until it has been remitted to the payee, and therefore…
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For how long should we retain charged off loan files when the borrower has gone through the bankruptcy process, leaving no opportunity for collection?
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We recommend retaining documents related to a charged off loan for at least four years, and in some cases, for as long as ten years. The IRS requires you to report debt cancellations over $600 on Form 1099-C (or, for some secured loans, Form 1099-A) and imposes a four-year retention period for the form or…