If you are in bankruptcy and your lender has told you that your Chapter 13 payments are increasing, you are not alone.
In Chapter 13, your bankruptcy repayment plan is determined by the court, and includes how much will be paid toward your mortgage and escrow. Your lender is not legally allowed to increase your Chapter 13 payment plan, but we are seeing situations where lenders are telling homeowners they owe more toward their escrow.
The worst part is that not only are the banks not allowed to increase payments, but these predatory lenders are creating real-life consequences for borrowers. Banks are marking borrowers as delinquent, reporting them to credit bureaus, and getting their assets wrongfully repossessed even though the borrowers did nothing wrong.
This is a major issue harming innocent homeowners, so it is important for both homeowners and lawyers to be aware of what’s happening. In this article, we’ll break down how escrow fraud happens with Chapter 13 payments, what to watch out for, and what you need to know to protect yourself from these predatory lenders.
If you are a bankruptcy attorney, I share additional Chapter 13 legal guidance in my CLE if you are interested in learning more about this to better protect your clients.
What Is Escrow?
Escrow refers to a portion of your mortgage that is set aside to cover property taxes and homeowners’ insurance. While these expenses can sometimes be paid separately, for most borrowers the lender collects the money each month as part of the mortgage payment and holds it in a separate account known as escrow. Then, when taxes or insurance are due, your lender pays those bills on your behalf using the money from the escrow account.
Because taxes and insurance can change over time, often increasing, the amount needed in escrow can also increase, which means your monthly mortgage payment can change.
If you’re not in bankruptcy, your lender can typically adjust your monthly mortgage payments to account for those increases. However, in bankruptcy, it works differently because your bankruptcy escrow payment is pre-determined by the court as part of your Chapter 13 repayment plan.
The court determines how your Chapter 13 payments are calculated by reviewing your income and debts owed. Just because your insurance and taxes have gone up does not give your lender the right to increase your mortgage or bankruptcy payment plan. If your lender wants to request, under Federal Bankruptcy Rule 3002.1, they need to file a request with a court before they change your payments. The issue is that, even though this is required by law, the banks are not complying.
How Escrow Fraud Happens With Chapter 13 Payments
It’s important to understand how these escrow issues happen so you can recognize if this may be happening to you.
As discussed, when you file for Chapter 13 bankruptcy, the court approves your repayment plan, including how much is paid toward your mortgage and escrow each month. Every year, your lender will do an escrow review to compare how much money is in the account versus how much is needed to cover taxes and insurance. If taxes or insurance have increased, the lender may feel that more money is needed in escrow.
If this happens, your lender is supposed to send that information to the court so the court can determine whether the repayment plan should be adjusted. But because the court can reject the lender’s request for higher payments, we are seeing situations where lenders are not going through the court. Instead, the lender contacts the borrower directly and says they now need to pay a higher amount. Most homeowners assume they have to pay it because the request is coming from the bank. But the reality is that in Chapter 13, how much payments are can only be decided by the court.
The problem is that it’s not as simple as simply ignoring the lender and continuing to pay the court-approved mortgage payment. The issue is that if homeowners do not pay the increased amount, even though under Federal Bankruptcy Rule 3002.1 they are not obligated to do so, the lender may mark them as delinquent or in default. In some cases, lenders report these borrowers to credit bureaus and have their assets repossessed. And if you do pay the higher amount, and it is more than you can afford, you may fall behind on other bills that come with additional consequences.
This fraudulent activity is going largely undetected because the lenders are only communicating with the borrower, so the lawyers and judges involved in the bankruptcy case have no way of knowing what’s going on.
If your lender has contacted you and is demanding higher payments, it’s important to contact your attorney or the court immediately.
Your Rights With Chapter 13 Bankruptcy Payments
It’s important to understand that the bank legally, under Rule 3002.1, can not change your Chapter 13 bankruptcy payments without going through the court first. If your lender believes your payment should change, they need to file a notice with the court. From there, the court will determine if the Chapter 13 payments should be adjusted and, if so, by how much.
In the situation discussed above, the lender is intentionally trying to go around that process, which is what makes it fraudulent. But it’s also important to understand that there are other situations with bankruptcy escrow services where borrowers are harmed because of servicing or recordkeeping mistakes made by the bank. For example, we are also seeing situations where borrowers successfully complete their Chapter 13 repayment plan, but because of a mistake on the bank’s end, the bank still believes money is owed and puts the borrower into default.
Even though this is different from the escrow issue above, it can still lead to serious consequences for the homeowner, and it is important to contact an attorney immediately if this happens to you.
Legal Support For Chapter 13 Escrow Payment Scams
If you are a borrower in Chapter 13 bankruptcy and your bank is reaching out to you claiming that you owe more money on your Chapter 13 payment, you should contact your attorney or the court immediately.
The lender’s actions may not be valid or legal, but you can still suffer serious consequences if the court is not made aware of what is happening. Borrowers may be marked as delinquent, reported to credit bureaus, or pushed into default even when the lender did not properly follow the court process.
If you’re a bankruptcy attorney, it’s critical to be aware of how lenders are using escrow adjustments to bypass the law and cause wrongful foreclosures. To learn more, you can sign up for my CLE where I break down in more detail how these lenders are violating Rule 3002.1 and causing wrongful foreclosure.
