Those of you who followed the road to passage of BAPCPA will recall Prof. Zywicki was the one who said that the bankruptcy reform bill was perfect and that not one letter needed to be changed. In light of the litigation that has ensued over just about every comma, period and semicolon I would suggest that Prof. Zywicki was perhaps just a tad overzealous.

In In re Nosek, 2007 WL 682581 (Bkrtcy.D.Mass. 2007) the debtor executed a $90,000.00 adjustable rate note (”Note”) with Ameriquest secured by a mortgage on her principal residence. When Nosek began missing payments on the Note, Ameriquest instituted foreclosure proceedings. To halt the foreclosure, Nosek filed for bankruptcy under Chapter 13. When Ameriquest received a payment, whether it was from the Chapter 13 Trustee on account of the arrears or Nosek herself for the then currently due installment, Ameriquest would apply the funds to the oldest outstanding contractual obligation due under the Note. If the payment was insufficient to satisfy a contractual obligation in full, Ameriquest would place the funds in a “suspense” account. In theory, the suspense account acted like a collection bucket to hold the payments until there were enough funds to satisfy one in full.

The Court noted several flaws with Ameriquest’s accounting system and found an overall failure to properly and timely account for Nosek’s payments. First, the process did not distinguish between pre-petition and post-petition payments; it simply looked to satisfy the oldest contractual obligation first. Thus, when a payment was received from the Chapter 13 Trustee or from Nosek, it was matched against the oldest outstanding contractual obligation. If the payment did not satisfy that contractual obligation in full, the funds were placed in a “suspense” account. Second, even when the total funds in the suspense account were sufficient to satisfy a contractual obligation in full, Ameriquest did not necessarily post them in a timely manner. Third, the accounting system, and the payment history Ameriquest generated for the rest of the world, gave the impression that Nosek was delinquent in her payments. It did not show that Nosek was current, something she claimed prevented her from refinancing her Note with another lender. Although Ameriquest claimed to have manually credited Nosek with having made the payments and internally considered her current, nothing in its accounting system, or on the payment history provided to her, reflected this.

The court, after lengthy discussion of the issues, awarded $250,000.00 in emotional distress damages and $500,000.00 in punitive damages under Section 105(a) for Ameriquest’s violation of Section 1322(b) of the Bankruptcy Code.

If your practice encompasses Chapter 13, let me know and I’ll be glad to walk you through the process of determining whether any of your discharged clients have a valid cause of action against their mortgage servicer.

You go through a bankruptcy case - Chapter 7, Chapter 13, it doesn’t matter which - and come out the other side of the case. You didn’t reaffirm your mortgage, and have opted to continue making payments.

A little while down the road, you miss a few payments. The mortgage lender serves you with papers for foreclosure and you get angry. Hey,you say, they can’t do this to me. I filed for bankruptcy!

Unfortunately, you’re incorrect. If you fall behind on the mortgage after bankruptcy the lender can - and will - foreclose on the house. Unless you’ve reaffirmed the debt during your bankruptcy, they can’t seek a deficiency judgment against you if the house doesn’t sell for enough money to cover the mortgage. That’s the difference.

A foreclosure action is a lawsuit to recover property, not to enforce a money judgment. For the most part, a mortgage remains intact after a bankruptcy case. That means the mortgage company can foreclose even after the case is finished.

But remember that the mortgage company cannot seek a deficiency judgment against you through the foreclosure. That’s why it’s important for you to have a lawyer carefully review the foreclosure papers to make sure they aren’t also suing you for a deficiency. If they are, it’s against the bankruptcy laws and considered a violation of the discharge injunction.