Chapter 13 Bankruptcy Lender Fees

According to Loansafe.org on October 14, 2010, New York State Comptroller expressed support for nationwide coordinated investigation to address the foreclosure crisis. The subprime lending demonstrated the dangers of allowing hasty, sloppy documentation procedures to undermine prudent financial conduct. The foreclosure crisis devastated families in New York.

With investigations into mortgage agreements, bankruptcy courts may review more in depth whether a bank has a right to collect fees incurred to protect its property rights, including fees for property inspections, price opinions, foreclosures, and bankruptcy.

When the borrower files a bankruptcy petition, after a notice of default for not making mortgage payments, foreclosure or collection efforts depend on the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. If the bank desires to move ahead with foreclosure, the bank may include the fees in its Proof of Claim. If the bank does not include fees in a Proof of Claim, some bankruptcy courts order the bank to establish the reasonableness of fees and request court approval before collecting fees.

The Bankruptcy Code stops a Chapter 13 debtor’s bankruptcy plan from modifying a mortgage lender’s rights under a mortgage agreement, subject to the debtor’s ability to satisfy mortgage payment arrearage through the repayment plan.

If a court allows bank fees, the fees will be included in the debtor’s Chapter 13 plan as part of the bank’s secured claim and collected through the repayment plan. The bank would file an application with the bankruptcy court for fees approval when the debtor does not pay. Along with the fees approval, the lender files a motion for relief from automatic stay to get the court’s permission to foreclose. A bankruptcy court in New York may deny the motion for relief, but let the lender to add its attorney fees to the arrearage the debtor pays during Chapter 13.

When a court dismisses a Chapter 13 debtor’s bankruptcy case, bankruptcy law no longer applies to fees collection. Collection of fees after bankruptcy dismissal depends on the terms of the mortgage agreement and New York state law. Bankruptcy courts keep jurisdiction to enforce their orders after dismissal. If a lender did not get a bankruptcy court to approve fees, it may not be able to collect fees when a Chapter 13 debtor’s case is dismissed.

When the Chapter 13 debtor receives a discharge, the court enjoins a bank from collecting discharged fees. Attempts to collect the fees may subject the bank to sanctions for violating the bankruptcy court discharge injunction.