Adversary Proceedings in the Bankruptcy Court
In California, the bankruptcy court is one of the few venues where a homeowner has significant procedural rights and where a judge is unlikely to say, "but the servicer only overcharged you by $200, so what is the big deal?"
When a borrower files bankruptcy under Chapter 7, 11, or 13, the mortgage servicer will file a proof of claim alleging that the borrower owes on the mortgage principal, unpaid interest, late fees, ancillary fees and all manner of other fees. The reason bankruptcy court is the preferred venue to contest the servicer's accounting of a mortgage is that in bankruptcy court, every penny matters and by shfiting the burden of proof, the servicer is required to prove his claim. This often starts a chain of events that results in servicers paying sanctions and attorneys fees and can make them more likely to make a meaningful loan modification, which is one that reduces principal.
Servicers will often claim to have paid fees related to delinquency or the foreclosure process that they either did not pay, or for which they sought refunds. Examples include fees paid to the local sheriff's department to remove the holdover tenant, empty the house using a van, payments to newspapers for required publication and many other fees. Often the servicer will seek refunds from these entities after the homeowner files bankruptcy and purposely fail to disclose this fact to the bankruptcy court to recover fees not actually paid.
A competent attorney will carefully evaluate and contest all fees and even where the servicer produces a copy of a check or a canceled check, the attorney should ask the servicer under oath or through discovery if it obtained a refund of any of these fees.
Many servicers engage in escrow double dipping which is where they make an arrearage claim to collect an escrow deficiency through both delinquent installment payments and listing the escrow deficiency as a separate amount. The amount is the same and if successful, the servicer will recover double the actual arrearage.
Who Cares If Your Service Defrauded You?
State courts are more likely to view a servicer's "error" in stating a fee or charge as an offset, which is to say, "If you owe $500,000 on a house worth $400,000, why does it matter that the servicer overcharged you by several hundred dollars in fees? Until the servicer overcharges you by more than $100,000, it is a waste of time to discuss this."
The bankruptcy courts are different. Bankruptcy judges tend to believe that the judicial process relies on the honesty of the creditor and debtor and of the adversary parties before it. Bankruptcy judges tend to award sanctions to either party where his opponent provides false or misleading information, inconsistent information, or fails to timely respond to discovery and orders.
Mortgage servicers are generally incapable of providing truthful, consistent evidence and testimony. Part of this problem is a tradition that servicers cultivated in the state courts, which tend to overlook misrepresentations and other disrespect of the integrity of the judicial process unless the homeowner can prove prejudice - that is to say unless the homeowner can prove that he suffered actual, quantifiable damages as a result of the servicer's error or misrepresentations. Because many borrowers cannot prove prejudice, in most California state courts servicers and lenders do not fear consequences for providing false or misleading information.
A second important reason servicers have tremendous difficulty providing truthful information is that they are often unable to obtain that information because of the systems their business model contributed to creating. It is irresistable under such circumstances for them to provde something and that something often is a guess or estimate of crucial financial information including the precise principal balance, arrearages, fees and charges. Each time the debtor can show that the creditor has provided false or misleading information in the proof of claim, in reponse to discovery, or in other court filings, the debtor is entitled to pursue sanctions and attorney's fees.
Servicers often keep two sets of books: one for the borrower and foreclosure process and a separate set for the mortgage backed security trust, trustee and certificate holders. The first set customarily has higher charges and fees than the second because many servicers earn a significant portion of their profit by charging borrowers for foreclosure-related fees and charges and then simultaneously seeking reimbursement from the master servicer working on behalf of the investors for the same fees and charges. Many servicers keep the difference. A good attorney will get a copy of the mortgage reports the servicer sends to investors and compare it to the the accounting the servicer presents in its proof of claim. A discrepancy should result in sanctions and additionally, once a debtor objects to a proof of claim, it is not possible for the creditor to amend his claim.
Problems with Challenging Standing in Bankruptcy Court Adversary Proceedings
Chapter 13 bankruptcy has debt qualification limits. If your debt exceeds the limit, you do not qualify. As of 2011, the unsecured debt limit is $360,475 and the secured debt limit is $1,081,400. Therefore, if you list your first mortgage as an unsecured debt in an effort to force the servicer or bank to prove that it owns the debt, that mortgage when combined with your other unsecured debts must not exceed $360,475 or you will not qualify for Chapter 13 bankruptcy.
In states like California, not a lot of people have first mortgages that when combined with other unsecured debt total less than $360,475.