A loan modification gone sideways

When a debtor files a bankruptcy petition, a stay automatically arises to prevent any collection efforts against the bankruptcy estate, allowing such efforts to go through the bankruptcy trustee. If the creditor wants to bypass the bankruptcy process for any reason, that creditor must seek permission from the bankruptcy court to do so.

In re Morris -The facts

In 2004, the debtor obtained a 30-year mortgage for $133,000 at 5.875 percent, resulting in monthly payments of $786.75. The debtor was then employed full time. By 2006, the debtor became ill with rheumatoid arthritis. By July 2008, she was fully disabled.

The debtor's financial condition worsened, and the bank servicing the mortgage offered a "special forbearance agreement" in an attempt to cure the default and avoid foreclosure. The debtor was unable to meet the terms of this agreement and remained in default. Eventually, the bank accelerated the note and gave notice of a foreclosure sale.

The debtor filed for Chapter 11 bankruptcy prior to the foreclosure sale. The bank asked for relief from the automatic stay, which the court granted. There were several unsuccessful, fitful loan negotiations. The debtor asked the court later to reinstate the stay to prevent the rush to foreclosure. The court allowed 180 days for a loan modification.

The court's order was entered on December 2, 2011; however, there was confusion as to when the bank's attorneys and agents received the notice. The bank was notified by the debtor's attorney of the order by December 9th. Meanwhile, between December 5th and the 9th, the bank initiated foreclosure proceedings.

The debtor sued that the bank for violating the automatic stay by: (1) beginning the foreclosure process in December; (2) trying to collect on the mortgage debt during December; (3) not providing a "reasonable" loan modification; and (4) not compiling with the national consent settlement.

The foreclosure process

The bankruptcy court decided that the debtor presented no evidence that the bank willfully and intentionally knew that the stay had been reimposed and acted contrary to the court's order. Instead, the bank's actions were merely "inadvertent."

In any event, the debtor presented no evidence of any injury; she merely claimed to have suffered emotional injuries and stated that she would have doctors testify in support her claim at trial. However, the bankruptcy court needed more evidence of any injury that the debtor suffered.

Collection actions

Simply put, the debtor's evidence dealt more with the refinance of the loan more than any violation of the bankruptcy stay. While the attempts to work out a loan modification were, perhaps, overboard and beyond frustrating, the law required more to cross the line to a violation of the automatic stay.

A reasonable loan modification

Neither the bankruptcy court's order nor the Bankruptcy Code (or any other statute) required the bank to offer a "reasonable" loan modification, meaning, to the debtor, a modification within the debtor's budget that would not extend the term of the loan.

National consent agreement

This claim was not brought up in the complaint, nor was her complaint amended properly to include it. It was denied.

The debtor lost her action to make the bank accountable for violating the automatic stay.

Loan modifications and bankruptcy

Loan modifications are far from simple, and if a bankruptcy becomes involved things can become very complicated very quickly. If you become behind in your mortgage payments, you should contact an attorneys to explore your options and, perhaps, level the playing field between you and the bank.

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