The greatest fear of many families in serious financial trouble is that they will lose their homes. Bankruptcy offers a last chance for families to save their homes by halting a foreclosure and by repaying any default on their mortgage loans over a period of years. Mortgage companies participate in bankruptcy by filing claims with the court for the amount of the mortgage debt. To retain their homes bankruptcy debtors must pay these amounts. This process is well-established and, until now, uncontroversial. The assumption is that the protective elements of the federal bankruptcy shield vulnerable homeowners from harm.
This Article examines the actual behavior of mortgage companies in consumer bankruptcy cases. Using original data from 1700 recent Chapter 13 bankruptcy cases, I conclude that mortgage companies frequently do not comply with bankruptcy law. A majority of mortgage claims are missing one or more of the required pieces of documentation for a bankruptcy claim. Furthermore, fees on claims often are poorly identified, making it impossible to verify if such charges are legally permissible or accurate. In nearly all cases, debtors and mortgage companies disagree on the amount of outstanding mortgage debt.
Despite these irregularities, mortgage claims in bankruptcy are infrequently contested. Imposing unambiguous legal rules does not ensure that a system will actually function to safeguard the rights of parties. The findings of this Article are a chilling reminder of the limits of formal law to protect consumers. Observing that laws can underperform has crucial implications for designing legal systems that will function as intended and for evaluating the appropriate scope of consumer protection.
Misbehavior or mistake by mortgage servicers can have grave consequences. Undocumented or bloated claims jeopardize a family’s ability to save its home. Beyond bankruptcy, poor or abusive mortgage servicing undermines America’s homeownership policies by exposing families to risks of overpaying or unjustified foreclosures. This Article’s findings offer an empirical measure of whether consumers can trust mortgage companies to adhere to applicable laws.
- real estate,
- mortgage servicing,
- mortgage debt
Available at: http://works.bepress.com/katherine_porter/1/