Bankruptcy and the Real Estate Settlement Procedures Act

For many people who file for bankruptcy in Oklahoma, the feeling of relief is immense. The debt load that kept you awake at night is either wiped out or condensed into an affordable repayment arrangement. You also benefit from an automatic stay that brings an immediate halt to stressful events such as:

  • Creditor and debt collector calls and letters
  • Wage garnishment
  • Frozen bank accounts

If you have a mortgage on a home or other property, you may also be protected by the Real Estate Settlement Procedures Act (RESPA), which can affect any current foreclosure proceedings and even prevent an unscrupulous lender from taking advantage of your situation.

The Real Estate Settlement Procedures Act Explained

The Real Estate Settlement Procedures Act (RESPA) was passed in 1974 to regulate the real estate settlement process by obliging all lenders to fully inform borrowers about all:

  • Closing costs
  • Lender practices with servicing and escrow accounts
  • Business associations between closing providers and other parties to the transaction

When borrowers file for Chapter 7 bankruptcy, their usual intent is to surrender the property and discharge all obligations to creditors. With Chapter 13, an attempt is usually made to keep the home by repaying arrears over a 3-5 year period. This is where RESPA’s statutes can help.

RESPA and the Loss Mitigation Process

The RESPA requires mortgage providers to mitigate investor loss as much as possible. This includes:

  • Contacting you before the 36th day of payment delinquency and informing you of available loss mitigation options
  • Refraining from commencing foreclosure proceedings until your loan is at least 120 days in arrears

This obligation is especially beneficial if you are planning on filing for Chapter 13, as the RESPA requires mortgage providers to work with you as much as possible to avoid foreclosure. This includes consenting to a reasonable repayment plan.

RESPA and Escrow Accounts

Most mortgage accounts are escrowed. This allows your lender to collect the money needed to pay property taxes and insurance on time and enables you to simply budget one house payment per month. When you file for Chapter 7, managing the escrow account continues as usual. With Chapter 13, you pay both your post-filing mortgage bills as they come due, as well as any pre-filing arrears. The latter often includes advances for items in escrow.

RESPA requires lenders to make full disclosure of all financial matters associated with an account, including the provision of an annual escrow statement. Although the Act does give an exception for a borrower in bankruptcy, you are still allowed to conduct an annual escrow analysis. This benefits you because:

  • You and your lender can correct any shortages before a bigger problem arises.
  • You can ensure that the escrow account has been managed in such a way that your loan is 100% current after bankruptcy.
  • Some courts have ruled that failure to notify you annually of any escrow shortages can translate into a waiver of the right to collect those shortages.

While the Bankruptcy Code requires your lender to stop collection efforts against you, it does not absolve them of the responsibility to inform you of the status of your mortgage or escrow account. This means that RESPA’s provisions on escrow account management must be followed, including appropriate disclosures.

This is actually good news for you and your mortgage provider, as these disclosures can prevent you from losing your home or compelling a court to rule that the lender has waived their rights to collect those amounts from you. From this perspective, the Bankruptcy Code and RESPA can work together to create a win-win situation for both sides.

Work with Experienced Legal Professionals

The RESPA advantage is not always applied to bankruptcy cases, simply because not everyone is aware of it. Giving you the fresh financial start you need can require a combination of professional experience and a creative, determined mindset. Attorney David Sisson is proud to put both at your service when you need them. To set up a no-obligation consultation, call us today.

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