How to Send ARM Notices When the Mortgagor is in Bankruptcy
A holder (mortgagee) of an adjustable rate mortgage (ARM) is required by law to notify the person obligated on the mortgage (mortgagor) when the interest rate changes. When the mortgagor is in bankruptcy, the notification requirement still exists, but things are slightly more complicated. First, in any type of bankruptcy case, the automatic stay is in place--pursuant to section 362 of the Bankruptcy Code, a creditor may not make any attempt to collect on debts while the debtor is in bankruptcy. However, a mortgagee is obligated by law to notify of a payment change. Second, in a Chapter 13 case in particular, the ARM notice is of great importance, and the success of the case will depend on timely receipt of the notice.
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Instructions
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1
Determine if the bankruptcy has been filed under Chapter 7 or under Chapter 13. This information will be located on the Notice of Bankruptcy mailed by the Court.
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2
Add a disclaimer to the notice, If the case is a Chapter 7 case, stating that the notice is for information purposes only and is not an attempt to collect a debt. Such a notice is not a violation of the automatic stay and may be sent directly to the debtor at the address on file.
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3
Draft a Notice of Payment Change, if the case is a Chapter 13 case. A Chapter 13 is a repayment arrangement wherein the debtor pays a Trustee for a period of years, and the Trustee disburses the funds to the creditors. A sample Notice of Payment Change can be found at the website for the National Association of Chapter 13 Trustees. The Notice must contain the following information:
Date the change goes into effect
Old interest rate
New interest rate
New principle and interest payment
Old index
New index
New monthly payment including escrow
Name and address of the mortgage company and the contact person
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4
Review the local rules for the district in which the bankruptcy has been filed, after drafting the Notice of Payment Change as set forth in Step 3, if the case is a Chapter 13 case. Each bankruptcy court has its own local rules, and the rules can be found at the particular court's website.
For example, some courts may only require that you serve the notice; others may require that you file the notice with the court and also serve it. In any event, always serve the notice by first class mail upon the Chapter 13 Trustee and upon the debtor through his attorney. Serving the debtor satisfies the notice requirement, and serving the Trustee ensures that the payment change will be effectuated.
Be sure to take note of when the Notice must be filed. Some courts may require that it be filed a certain number of days prior to the date the change is scheduled to take effect, or within a certain number of days after the change takes effect.
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Tips & Warnings
Read the local rules for the district very carefully.
When in doubt, hire local attorneys who are familiar with the rules, the Trustees and the judges.
Make certain that the information on your Notice is accurate and that the Notice is filed and/or served on time as set forth in the local rules.
If you fail to properly notify a Chapter 13 Trustee, the court and the debtor of a change in the mortgage interest rate, you could face sanctions from the bankruptcy court.
You could also suddenly have a debtor who is even further behind on his mortgage than he was when he began his Chapter 13 and who lacks the financial ability to cure the arrears. If forced to foreclose, you will likely lose money, either by getting a house back on your books that you cannot sell or by selling at a foreclosure sale for far less than the property is worth.
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