What Should Your Servicer Do After You File for Bankruptcy?

If this is your first visit to my website, welcome! My name is Christine Springer and I'm the founder of Desert Edge Legal Services and the author of the content on this site.

Disclaimer: I’m a paralegal, not an attorney and cannot give you legal advice. This is not meant to be legal advice, and there is no guarantee that the information in this post will work for your individual situation. Please consult with an attorney if you have questions about your individual situation.

We hear a lot of negative stuff about bankruptcy and much of that has been through programming of the masses.

It's been my observation that the average American is fed a steady diet of messages about how it's bad to accept help from the government, that we should pull ourselves up by our bootstraps (AKA "rugged individualism") and various other messages that are reinforced through institutions such as mainstream media and credit reporting agencies.

The subtle message is, CONFORM, or you will be punished. Meanwhile, the wealthy play by a completely different set of rules.

If the data I've seen in the past few days is correct, there will be a flood of foreclosures filed in the weeks and months ahead. In the last real estate crisis, bankruptcy was hands-down the best way to deal with mortgage issues.

At that time, the servicers made it very difficult to get loan modifications, and even the government's HAMP program was awful. It did not give the borrowers a right to sue under the program so it was basically toothless.

Wrangling with your bank to obtain a mortgage modification was a very stressful experience. I can't tell you how many stories I heard about how the banks told borrowers they never got their loan modification paperwork. There was dual-tracking of both foreclosures and loan modifications, which was really upsetting to many people who thought the bank was working with them, only to find out they had a sale date, or worse, that the bank sold their home right out from under them while the borrowers thought they were working out a loan modification.

There were a lot of other issues with loan modifications but I think you get the idea. The banks made it impossible to get one through what I would call asymmetrical warfare tactics. They said one thing but did something else. It was horrible.

Ditto all that on short sales. If they wouldn't give you a modification, why would they give you a short sale? And why would a homeowner go through all that for the bank?

In Arizona and other non-judicial states, you have to file a lawsuit to stop the sale, and this was not a picnic, either. You had to get a temporary restraining order, and pay a bond and then you were looking at a Motion to Dismiss from the banks. The courts were not sympathetic to homeowners early on, and it was a very expensive way to save your home, and you weren't guaranteed to win.

Contrast that with a bankruptcy filing, where you don't have to fight with anyone, show up anywhere, argue, confront or be stressed out. You just had to get the case filed before the sale and things just sort of de-escalate while your lawyer starts figuring out your plan payments.

I'm not saying this is the best option for everyone, but if you have a lot of debt that you also want to get rid of while you need to stop a foreclosure, it's a very good way to go, provided you can afford your plan payments. The first one is usually due within the first 90-120 days if you file for Chapter 13.

Sometimes if you have a second mortgage it can be scraped off in a bankruptcy proceeding. This is definitely something you will want to speak to a lawyer about.

The big difference I noticed with clients who filed bankruptcy was that there was no "deadbeat" narrative. People file bankruptcy because they can't pay their bills, and so there's really none of that negative messaging in these proceedings. The judges are not going to lecture you for not paying your bills. You are there because you weren't able to work something else out, and now you are asking for help through the law.

The other thing is, you can use what is called an adversary proceeding to challenge the information on the Proof of Claim. I had a handful of clients use this successfully after I finished a mortgage analysis on their loans. The results were excellent.

The banks make all sorts of statements on the Proof of Claim that can conflict with the information that was filed at the recorder's office and you can frequently catch them in their "mistakes" which can lead to them changing their mind about giving you a better loan modification.

However, adversary proceedings are generally not something most bankruptcy lawyers want to do. Most of them don't want to do all the extra work, and I think others just don't know enough about how to attack the proof of claim on a mortgage successfully.  

The ONLY attorney I ever saw do this was Barbara Forde. She and I worked on Sam Sanchez's case. Barbara knocked it out of the park on the first try, but it was a LOT of research for both of us. So if you're in Arizona you're in luck – Barbara Forde knows what she is doing on these.

Everyone else, you'll have to find a lawyer who will help you if you want to challenge the proof of claim. Don't despair, though – most of the time you can get a good outcome without challenging the proof of claim or filing an adversary proceeding.

Once you file for bankruptcy, there is an automatic stay and debt collection must stop. Debt collection includes things like phone calls, letters, repossessions and foreclosure sales.

Obviously you have to file before the sale or repossession, but I have seen these be unwound if adequate notice was given and the sale went forward.

I found this excellent guide from the National Law Review that talks about what creditors are supposed to do when a debtor files for bankruptcy:

"What Should the Creditor Do Once a Bankruptcy Is Filed?

Upon receiving notice of the bankruptcy petition being filed, the creditor is prohibited from taking action to collect any debts from the debtor that arose prior to the case being filed. Said differently, until you can get advice from bankruptcy counsel:

• Stop contact: Automatic “robo” calls, standard collection calls, emails, letters, etc.
• Stop collections efforts: Litigation, foreclosure proceedings, enforcement actions, etc.
• Stop new contracting: Renegotiating contracts, refinancing, mortgage modifications, wage garnishment arrangements, payoff plans, etc. A creditor should not, however, terminate a contract with a debtor because a debtor files for bankruptcy."

Here's a visual flow chart that is intended for creditors but is also useful for borrowers.

If a lender or creditor continues to contact you after you have filed bankruptcy, there can be serious consequences. Most of the bigger banks will stop the calls within a few days of receiving notice from the bankruptcy court or from your attorney. Some creditors will call you, but will hang up quickly when you tell them to call your lawyer.