Bankruptcy, Foreclosure, and Late Fees

One of the reasons that lenders do not like when homeowners file for bankruptcy to stop foreclosure is that the automatic stay prohibits the bank from moving forward with the foreclosure process. The bank may have to give up some of the eventual profits of selling the home at auction and reselling it later if the borrowers are able to get back on track through the bankruptcy process.

In retaliation for the filing of bankruptcy by a borrower, banks and their lawyers have read ambiguous contract clauses to allow the imposition of ridiculous junk fees on accounts. The fee most likely to be junk is when lenders charge monitoring fees to a mortgage when homeowners file for protection, even if they file a Chapter 7 which does not actually effect the lender's lien on the property.

Of course, these fees are not even adequately disclosed to borrowers as they are charged. Monitoring fees once a homeowner enters bankruptcy may be assessed on an escrow account or taken from the suspense account. A suspense account is a tactic used by banks to hold payments from borrowers but not credit these payments to the account, and is often used during foreclosure to take payments but technically refuse them.

Many lenders attempt to justify these charges through the clause in the mortgage contract that allows the bank to charge to the homeowner any costs for litigation. But these clauses are written with the maximum amount of ambiguity and do not even seem to permit such junks fees as a cost to monitor the bankruptcy process. Even based on the language of such clauses, though, the fees may be prohibited.

For instance, litigation clauses in mortgage documents may only allow the imposition of fees on accounts when the lawsuit affects the property or the lien, which is not the case for bankruptcy proceedings. Also, the litigation must be to enforce the lender's rights, and a bankruptcy is not an action to enforce the rights of the lender, and so a monitoring fee may not be allowed by the mortgage contract.

Also, attempting to collect fees from borrowers who are in bankruptcy may be a violation of the automatic stay. Especially if the lender tries to obtain payment of the fee directly from the homeowners, the stay may be violated. Another section of the bankruptcy code prohibits collecting fees not authorized by the plan as well as failing to credit payments made under the plan. Banks, in imposing monitoring fees, may violate this section.

Finally, lenders that impose these bankruptcy junk fees may also be violating state unfair and deceptive acts and practices statutes. Relying on ambiguous contract language is a potential violation, while charging fees not authorized by the contract is another. Homeowners attempting to file bankruptcy to stop foreclosure should be aware of these abuses that lenders state are authorized by the loan documents but really are not.

Resources:

http://www.nielsenlawgroup.net/what-we-do/bankruptcy/arizona-bankruptcy-attorney/

http://ezinearticles.com/?Bankruptcy,-Foreclosure,-and-Late-Fees&id=2921242