Mortgages Discharged In Bankruptcy: Servicers Bombard Consumers With Confusing Disclaimers

Strong bankruptcy laws are part of America’s legal heritage. They allow people who make mistakes, or are just unlucky, a chance to start over by erasing their debts. Bankruptcy is not an easy process, since it involves either “liquidation” through Chapter 7 or several years in a Chapter 13 payment plan that takes up almost all disposable income. Bankruptcy often means surrendering a home to allow a bank to foreclose.

After surrendering their homes in bankruptcy and moving out, some consumers continue to receive demands for payment from mortgage servicers. These servicers send the same standard form letters and statements they would to any other debtor adding only a boilerplate. But often the disclaimers are just confusing.

This is an attempt to collect a debt and any information provided with be used for that purpose. If this debt is in active bankruptcy or has been discharged in bankruptcy, this statement is for informational purposes only and this is not an attempt to collect a debt.

The letter says the letter says that it is both “an attempt to collect a debt” and “not an attempt to collect a debt”.

This sort of self-serving boilerplate has not impressed the federal courts. As one judge observed “[a] disclaimer stating that the letter ‘is not an attempt to collect a debt,’ does not make that true.” Donnelly-Tovar v. Select Portfolio Servicing, Inc (Nebraska, March 3, 2013). Because of the vague and contradictory disclaimer, a consumer receiving it “would be left ‘scratching [her] head upon receipt of such a letter.’”

That was in 2013, but servicers are still doing the same thing. In Roth v. Nationstar Mortgage, LLC (Florida. July 1, 2016), another U.S District Judge, more than three years later addressed the same tactic, with the same result. Nationstar included a long disclaimer in an otherwise standard form mortgage statement:

This statement is sent for informational purposes only and is not intended as an attempt to collect, assess, or recover a discharged debt from you, or as a demand for payment from any individual protected by the United States Bankruptcy Code. If this account is active or has been discharged in a bankruptcy proceeding, be advised this communication is for informational purposes only and is not an attempt to collect a debt. Please note, however, that Nationstar reserves the right to exercise its legal rights, including but not limited to foreclosure of its lien interest

The court found that “it is in fact difficult to conceive of any credible reason for Nationstar to send the Informational Statement other than to pressure Plaintiff into making payments on the mortgage debt.” After all, the statement had all the features of a normal statement asking for money:

The Statement lists the total amount due, contains a payment due date, states that a late fee will be charged for an untimely payment, gives six possible payment methods, and separates out from the total amount due the amount of fees and charges previously assessed. That is not all. The Statement contains an “Important Messages” box advising Plaintiff that her “escrow account has a negative balance,” and expressly “recommend[ing she] make additional  payments” to avoid “an increase in [her] monthly escrow payment.”7 There is  also a detachable “payment coupon,” which states the total amount due and  recalculates the amount due for a late payment.

The court concluded that despite the disclaimer, the least sophisticated consumer (the hypothetical person most courts use to decide whether a debt collector letter is confusing) “would feasibly be induced to make payments.”

In fact, the mortgage industry agrees with the court’s ruling that a servicer has no business sending out such statements. This is what mortgage industry groups told the Consumer Financial Protection Bureau in 2013:

Consumers’ decisions to publicly notify their mortgage creditors of the consumers’ election to surrender their homes . . . should be respected.  Bombarding these consumers monthly with periodic statements demanding thousands of dollars that the consumers have either elected not to pay, or cannot afford to pay, has repeatedly been recognized as inappropriate under the Bankruptcy Code.

Why some servicers continue “bombarding these consumers” remains a mystery. However, it is increasingly clear that confusing disclaimers will not protect servicers from liability for those letters.