We discuss whether a Debtor in bankruptcy is required to make monthly mortgage payments.
In Los Angeles, many individuals are often confused with real estate terms such as “Note, “mortgage”, “Deed of Trust”, “principal and interest” and “escrow.” We though it would be useful if we summarize what each of these terms mean, in simplified form, without getting into technical words. Often, our Los Angeles attorneys at Katz Law encounter issues involving real estate law and real estate finance in California. We think it is important for one to know the meaning of common terms before understanding the issues that they may be facing.
What is a Note?
Without any consideration to real estate or real estate law, the word Note means “a brief record of facts, topics, or thoughts, written down as an aid to memory.” However, in the real estate, the word “Note” or “Promissory Note” means a written contract where a borrower (person who lends money from the bank (or another creditor)) agrees to repay the lender at terms that the parties agree on. For example, if the bank is lending you $100,000.00 at 5 percent interest, the Note will specify that, and will also indicate what happens if you do not make your payments (as well as other terms). It is important to read all of the terms of the Note so that you know what you are in for when borrowing money.
What is a Mortgage or a Deed of Trust?
A Mortgage or a Deed of Trust is the security instrument that secures the Note. What does that mean? it is the piece of paper that allows the bank to put a lien on a property. This is also the instrument that allows a lender to foreclose on a property because of its lien if there is a default on payments.
People in California often use the word “mortgage” when the documents they are describing are a “deed of trust” or a “note. The big differences between a mortgage and a deed of trust are the parties involved, and the manner in which a lender can foreclose in case of a default.
The Mortgage Payment – Principal and Interest Component and the Escrow Component
The monthly mortgage payment that a borrower in Los Angeles has to pay normally includes several components: a principal component, an interest component and an escrow component. We will explain each of those component.
The principal component of the payment is the amount that you pay each month toward the original amount that you borrowed from the bank. So, in the example above, that would mean that portion of the payment that will go to pay the $100,000 originally borrowed.
The interest component of the payment is the amount that you pay each month toward the interest on the original amount that you borrowed. In other words, this is the portion of the payment that goes to pay the bank its fees to letting you borrow money.
The escrow component of the monthly mortgage payment is the portion of the payment that is used to pay for the property taxes and property insurance on your home. While you have the option to pay property taxes and insurance directly, many people choose to have the bank pay those through an “escrow account” (and then charge you monthly for it). Additionally, borrowers are entitled to receive yearly reports (or “Escrow Analysis Disclosure Statements” that advise how much money the bank is paying for the property taxes and insurance, and how much will the escrow component of the payment be.
While a loan in Los Angeles may be a “fixed interest” loan, and thus the principal and interest component remains the same, the escrow component of the payment often charges yearly.
Consult With A Qualified Los Angeles Attorney Now!
If you are an owner of a property and need assistance with a real estate matter, contact our qualified attorneys at Katz Law now! We are California attorneys located in Los Angeles who have experience dealing with mortgage-related issues.
Borrowers are entitled to receive monthly statements each month so that they know the amount of their monthly mortgage payment. Without receipt of these monthly statements, it may be difficult for a borrower to know the amount of monthly mortgage payment that he/she has to pay each month. While a borrower may know the principal and interest component of each payment because it is subject to a fixed interest rate (and thus, not subject to change), the escrow component of each payment, which is normally used to pay the property insurance and property taxes that come due and owing, can change every single year.
Despite the importance for borrowers to receive monthly statements, when a borrower files a bankruptcy, whether a Chapter 7, Chapter 11, or a Chapter 13, a lender in California is not required by any specific law to send monthly statements to the borrower, while the bankruptcy is active. While borrowers often demand these statements, the lender has no obligation to comply with these demands. However, the bankruptcy law does not leave borrowers completely in the dark. Federal Rule of Bankruptcy Procedure 3002.1 was enacted to ensure that borrowers know what their monthly mortgage payment is while in a Chapter 13 bankruptcy.
When Does Federal Rule of Bankruptcy Procedure 3002.1 Apply?
Federal Rule of Bankruptcy Procedure (“FRBP”) 3002.1 only applies in Chapter 13 cases. It also only applies to a lender that has a lien in first position (not a junior lien or a second deed of trust) against Debtor’s principal residence. If the lender/bank has a lien secured by a deed of trust against Debtor’s commercial property, the rule will not apply. Additionally, as the rule came into effect on December 1, 2011, any payment changes that came before that date are not subject to the Rule.
Additionally, a lender is required to comply with the rule so long as the Borrower is in bankruptcy and no relief from the automatic stay was granted by the Court. In Chapter 13 cases, lenders move for relief from the automatic stay if a borrower does not make monthly mortgage payments; if said Motion by a lender is granted, the lender no longer has to comply with the notice requirement in FRBP 3002.1.
What Must a Lender or the Bank Due Pursuant to FRBP 3002.1
Assuming the borrower’s bankruptcy and the loan at question is subject to the FRBP 3002.1, the lender must give the borrower notices of any change in the monthly mortgage payment, whether it be a change in the principal and interest component of the payment (such as an interest rate change) or a change in the escrow component of the payment. The lender must complete and file with the a Court a specific form that outlines exactly which component of the payment is changing. Additionally, the form requires that the lender attached a notice (usually computerized), such as an annual escrow analysis, which provides further details on how the new payment is calculated.
What Happens if a Lender Fails to Comply with FRBP 3002.1?
FRBP 3002.1(f) provides that if a lender fails to file a Notice of Monthly Mortgage Payment Change, the lender will be precluded from requiring the Debtor to pay the amount set forth in the Notice. In other words, if the payment was subject to an increase, but no Notice of Mortgage Payment Change was filed, the lender could not hold the Debtor to pay this amount “unless the court determines that the failure was substantially justified or is harmless.” Additionally, FRBP 3002.1 specifically provides that the Court may “award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.” Thus, the borrower may be entitled for sanctions if the lender fails to comply with the rule requiring notices of mortgage payment change.
What Happens if the Lender Complies with FRBP 3002.1, but Files a Late Notice of Mortgage Payment Change?
FRBP 3002.1 provides that a lender will be subject to the above-described penalties if the lender “fails to provide any information;” however, FRBP 3002.1 does not explain what happens if a lender files the Notice of Mortgage Payment Change required pursuant to FRBP 3002.1, but files said Notice late. In such a situation, a lender should not hold the borrower liable for a higher payment that he/she did not have notice of. Thus, the Debtor should receive credit for any monthly mortgage payments that were tendered, in a lower amount, because the borrower did not receive the Notice required pursuant to FRBP 3002.1. Will the borrower be entitled to sanctions? The answer depends on the arguments that are made to the judge regarding the prejudice sustained by the borrower. Despite that the rule does not provide for sanctions in a case in which a Notice of Payment Change is filed late (as opposed to not being filed at all), a court may choose to award sanctions or attorneys’ fees if a convincing argument is made.
Consult With A Qualified California Bankruptcy Attorney Now!
Katz Law has experience representing Debtors and Creditors, and has litigated issues concerning FRBP 3002.1 on many occasions. If you have any questions regarding FRBP 3002.1 or need the assistance of a qualified bankruptcy attorney, contact Katz Law now! We are California attorneys located in Los Angeles who have dealt with various scenarios involving bankruptcy.
Call us at (844) KATZ-LAW for a FREE consultation!
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No one can dispute that the holiday season is the best time of the year. It is that time of the year that everyone seems to have a smile on their face, vacation is on everyone’s mind, and families find the time to finally be together. Aside from these byproducts of the holiday season, shopping is also on everyone’s mind. People are either shopping for items for themselves or gifts for loved ones. There isn’t many people that are able to “escape” the holiday season without some form of shopping. But, unfortunately, shopping can be dangerous. We are often told that we should “live within our means,” but its harder said than done, especially during the holidays.
People who are not financially stable often feel compelled to purchase gifts for their loved ones for many reasons. First, it is common courtesy to buy a gift for someone that gets them a gift. Additionally, for those who have kids, not buying a gift for Christmas or Chanukah can cause a child to be very upset (to say the least). For these reasons, the holiday season places people in a position where they are almost forced to spend more than they can afford to. If one does not have money saved to buy a gift, he/she normally uses a credit card. Credit cards are probably the most-used tangible item during the holiday season. Unfortunately, racking up a large credit card bill can often force one to file a bankruptcy.
Bankruptcy Filings During the Holiday Season
It is not a secret that December is a “quiet” month for bankruptcy attorneys. Why? Because people are busy getting their homes ready for the holidays. Also, who really feels like speaking to a bankruptcy attorney during the holidays? January is normally also a quiet month because people have yet to receive their credit card bills containing charges for holiday shopping. Nonetheless, the months following (February and March) are some of the busier months of the year for us bankruptcy attorneys.
It is a common misconception that people who are struggling financially and are planning to file a bankruptcy can simply put all of their christmas shopping on their credit cards, and then have their credit card debts “wiped out” by filing a chapter 7 or a chapter 13 bankruptcy and getting a discharge (for further explanation of what is a discharge, click here). Credit card companies are aware of such behaviors, and often exercise their rights under the Bankruptcy Code to prevent bankrupt debtors from being able to erase debts by way of a discharge under a chapter 7 or a chapter 13 bankruptcy.
Can Credit Card Bills Be Wiped Out Through Bankruptcy?
Section 523(a)(2) of the Bankruptcy Code provides that debts (including credit card debts) of more than $550 for “luxury goods and services,” incurred within 90 days before filing of the bankruptcy, are presumed to be non-dischargeable (and cannot be “wiped out”). While goods or services that are reasonably necessary for support or maintenance (such as buying food) are not considered “luxury goods,” holidays gifts are usually considered just that, as those are not necessary for support or maintenance. Thus, credit card companies can argue in the bankruptcy Court that credit card debt incurred for gifts purchased during the holidays, or vacations taken during the holidays, cannot be discharged, or “wiped out”, in bankruptcy. For a credit card company to have the Court determine that a debt cannot be discharged, it has to file a non-dischargeability action. The bad news is that fighting such actions by credit card companies can be expensive for bankruptcy debtors due to the attorneys’ fees that will be charged in defending those actions. Attorneys’ fees will have to be paid whether or not the bankrupt debtor is the ultimate winner in the action (and succeeds in discharging the debt). As such, the practice or building up credit card debt with bankruptcy in mind can be dangerous.
We recommend that our clients live within their means, and spend frugally if they know that that times are tough. For those who are financially hurting and need to to consult with an attorney regarding the possibility of filing a chapter 7 or a chapter 13 bankruptcy, get the guidance you need from a bankruptcy law firm like KatzLaw! Contact us now and speak to our attorney.
Call (844) KATZ-LAW for your free, no obligation consultation!