Bankruptcy filing decision without correct knowledge

Mortgage claims are a key determinant of the outcome of consumer bankruptcy cases. A

core function of Chapter 13 bankruptcy is helping families save their homes,194 which the Bankruptcy Code effectuates by permitting debtors to cure any arrearage on a mortgage over a reasonable time.195 Because mortgage creditors are most Americans’ largest creditor, their actions in bankruptcies heavily influence debtors’ success in saving their homes from foreclosure.196 A family’s ability to confirm a Chapter 13 plan or cure a default may turn on the amount fixed as owing to the mortgage creditor.197 Debtors cannot easily generate additional disposable income if alleged obligations to mortgagees magically increase or if fees multiply without justification. The debtor’s ability to pay mortgage arrearages, as a practical matter, determines the success of a case. Not only does plan confirmation turn on this issue, if the debtor misses any plan payments, the mortgage creditor frequently will seek relief from the stay to proceed with a foreclosure and the debtor’s bankruptcy may be dismissed. Thus, the amounts of mortgage proofs of claim have direct effects on bankruptcy’s usefulness as a home-saving device.

Miscalculations about mortgage debt have grave consequences for families at nearly every point in the bankruptcy system. From the outset, debtors may be harmed if they make the bankruptcy filing decision without correct knowledge of their mortgage debts. If debtors underestimate the amount of their outstanding obligations to mortgagees, which the data show occurs in the majority of cases, their attorneys may         mis-advise. Conversely, if debtors overestimate the arrearage, they could file bankruptcy without pursuing other types of relief, such as borrowing from families or friends, seeking forbearance from the mortgagee, or selling an asset. Debtors’ inability to report their mortgage debt with reasonably accuracy indicates a serious shortcoming in the pre-bankruptcy counseling process. The data suggest that attorneys who do not verify the mortgage debt may give sub optimal advice to their clients. This situation could be one factor that contributes to the low success rate of debtors.

After families file bankruptcy, discrepancies in debtors’ and creditors’ records of the amount of mortgage debt and incomplete mortgagee proofs of claim lead to either of two undesirable consequences. In most instances, the data show that debtors do not verify the amount requested on the mortgagees’ claim and risk overpaying that creditor. In so doing, debtors increase their burden in confirming and completing a Chapter 13 plan. This outcome, however, saves the debtor the litigation and negotiation costs of seeking clarification from the mortgagee.