Welcome to Part II of our series on the servicing of discharged mortgage debt (catch up on Part I). This part will discuss communications to discharged borrowers and evaluate various disclaimers that can be utilized.
The only way to fully eliminate the risk of violating the bankruptcy discharge injunction is to cease all communications to borrowers who received a discharge of the debt. However, this drastic change in practice is not realistic. First, the discharge only eliminates the borrower’s personal liability – the servicer’s lien, and its right to foreclose on the collateral, still exists. A discharge of this personal liability does not preclude servicers from communicating information to the borrower that may be relevant to possible foreclosure or how to avoid foreclosure, and does not absolve the servicer of any existing requirement to send such notices. In fact, courts have found that statutorily required pre-foreclosure notices do not violate the discharge injunction (although a carefully worded disclaimer is still advisable). Second, where the borrower is still living in the home, and is still paying on the loan, the borrower may be seeking additional information about the loan, including how much they are required to pay to avoid foreclosure. Just as the discharge injunction does not absolve the servicer of sending statutorily required foreclosure notices, neither does it absolve the servicer of sending escrow statements as required by RESPA. Thus, servicers are left manipulating this required correspondence to such borrowers to mitigate the risk of violating the discharge injunction.
To determine whether a post-discharge communication violates the discharge injunction, courts embark on a fact-intensive inquiry into whether such communication was an attempt to collect the debt from the borrower personally. Courts heavily scrutinize the existence of, and language within, bankruptcy disclaimers on borrower communications. As part of this scrutiny courts will view such communications from the perspective of the unsophisticated consumer. Following such inquiries in cases involving correspondence to borrowers following their discharge, courts have found discharge violations where such correspondence included due dates, amounts due, and stated that a late fee would be charged for untimely payment. However, if the statement is for informational purposes only, and has a proper disclaimer, a court is less likely to find a violation. A proper disclaimer should include a statement acknowledging the effect of the discharge, that the creditor is not attempting to collect discharged debt against the borrower personally, and that any payments would be voluntary. However, a survey of relevant case law shows it is abundantly clear that there is no “magic shield” for a bankruptcy disclaimer, and even innocuous statements under the right facts may be found to violate the discharge injunction. In fact, similar disclaimers may appear on correspondence in a case where the judge finds no discharge injunction violation in one case, and where an opposite finding results in another case.
The specific circumstances of the borrower-servicer relationship, and the facts presented by the borrower, weigh heavily into a judge’s decision of whether the servicer has violated the discharge injunction. One of the most critical facts is the volume of communication. Even where a servicer uses carefully crafted disclaimer language, if it sends a large quantity of letters offering alternatives to foreclosure in a short period of time, this will look more like coercive behavior than sending similar correspondence once. Further, if the borrower indicated an intent to surrender the property that fact will often tip the scales toward a finding of a discharge injunction violation. Lastly, if the borrower or his attorney has previously requested that the servicer cease sending such correspondence, the court is more likely to find a violation.
Crafting correspondence to discharged borrowers is further complicated where that correspondence requires an FDCPA disclaimer. While courts have generally found that statutorily required pre-foreclosure notices do not violate the discharge injunction, servicers still must take care to carefully review and craft disclaimer language. These FDCPA disclaimers often look to be in direct conflict with the bankruptcy code where they state that the correspondence is a communication from a debt collector, for the purpose of collecting a debt and that information obtained may be used for that purpose. The servicer of a discharged debt therefore looks like they are telling the borrower that they intend to collect the debt, but that they are also recognizing that they cannot do so. This dichotomy has led some courts to find that this type of disclaimer could be misleading to the least sophisticated customer. However, there is at least some case law support that it is permissible to include FDCPA disclaimers in addition to significant and prominent bankruptcy disclaimers.
- Servicers should ensure that all communications to discharged borrowers are carefully tailored to acknowledge the discharge and the voluntary nature of continued payments, and contain other appropriate language and disclaimers. Such disclaimers should be prominently included and not part of the “fine print.” Where possible, disclaimers should not be generic or hypothetical.
- Borrowers should be regularly reminded that all payments are voluntary and that they have no personal obligation to pay the servicer.
- Repeated disclaimers are beneficial, and all correspondence related to payments of any type should have disclaimers.
- Servicers should consider the totality of its communications with borrowers, such as spacing of all letters, loss mitigation overtures, monthly statements, escrow statements, and/or phone calls.
- Servicers should avoid sending any unnecessary letters to discharged borrowers, including letters not otherwise required by non-bankruptcy law.
Part III of this series will discuss loan modifications for discharged borrowers and evaluate practices that servicers can employ to reduce risk.