The terms of many mortgages provide for the establishment of an escrow account, or in other words, an account set up to hold funds collected in advance that have been set aside for a specific purpose. Often, escrow items include obligations such as property taxes and homeowner’s insurance. A portion of monthly mortgage payments will be deposited into the escrow account, and the funds will then be distributed by the mortgage servicer to pay for escrow items as they become due. This arrangement ensures that homeowners do not have to scramble to come up with extra cash when taxes or insurance bills arise.
However, when a homeowner files for bankruptcy, the situation can change. Sometimes, either before or after submitting a bankruptcy petition, the homeowner has failed to keep up with payments into the escrow account. Increasingly, lenders have been trying to collect unpaid amounts for escrow items in a manner that impairs a homeowner’s ability to adhere to a feasible bankruptcy repayment plan.
Chapter 13 and Escrow Shortages
In a Chapter 13 bankruptcy, individuals who earn a regular income are able to adjust their debt. Those filing under Chapter 13 come up with a repayment plan that will allow them to make monthly payments to creditors without undue hardship. The Chapter 13 plan lasts for a term of three to five years, and must be approved by a bankruptcy court. Chapter 13 bankruptcy has a number of advantages; for instance, it may mean lower payments, personal property will not be sold as it may be in a Chapter 7 liquidation, and filing for Chapter 13 bankruptcy stops home foreclosure proceedings.
Often prior to filing a bankruptcy petition, a debtor has missed one or more payments for escrow items (the portion of debt that is overdue after missing payments is known as an arrearage). Previously, some mortgage providers, even after failing to object to the amount designated for monthly mortgage payments under a homeowner’s Chapter 13 plan, would ask for payment for an escrow arrearage within a short amount of time after the bankruptcy petition had been filed as part of mortgage payments. Immediate or nearly immediate repayment of these pre-petition escrow shortages could cause debtors to be unable to meet obligations under their Chapter 13 plan.
In In re Beaudet, a recent case heard in the United States Bankruptcy Court for the Middle District of Tennessee, a judge ruled that pre-petition escrow arrearages could not be included in the amount asked for through ongoing mortgage payments; the mortgage provider was entitled to a claim for these escrow shortages, just not in terms of mortgage payments. This is significant in that all mortgage payments that come due during a Chapter 13 plan must be paid on time, but other debts may be rescheduled. By declining to include pre-petition escrow shortages in mortgage payments, the court gave the debtor a far better chance of keeping up with payments.
But, what about escrow arrearages that arise after a debtor has filed a Chapter 13 bankruptcy petition? Post-petition escrow shortages are also common, and when mortgage providers attempt to make up for unpaid amounts by imposing large obligations over a short period of time, they can be just as damaging to a debtor’s ability to stay above water. Due to the complicated nature of escrow arrangements in many mortgages, it can also be difficult to parse out exactly where the line is between pre- and post-petition escrow shortages.
Since In re Beaudet was limited strictly to pre-petition escrow arrearages, its holding does not apply to post-petition escrow deficiencies. But, In re Beaudet and other cases throughout the nation indicate that new developments in the law are leaning towards making it more realistic for debtors to meet their obligations in Chapter 13 bankruptcy proceedings. Since there is little substantial difference between the pre- and post-petition escrow shortage scenarios, it is likely the post-petition issue will be heard in courts soon.
Getting Help
It is uncertain how courts will come down on the post-petition escrow shortage issue. But, a favorable ruling could mean much-needed relief for Chapter 13 petitioners struggling to make payments.
If you have questions about pre- and post-petition escrow shortages or any other bankruptcy issues, contact an experienced bankruptcy attorney in your area. Your attorney will be able to both skillfully guide you through the bankruptcy process and ensure you receive the most favorable arrangement possible; many law firms even specialize specifically in bankruptcy.
Going through bankruptcy can b e complicated and challenging. But, you do not have to tackle it alone. Get in touch with a bankruptcy attorney today.
