The Mortgage Proof Of Claim In Bankruptcy: Official Form 410A – April 2017
Terry Jessop & Bitner Newsletter
Issue 41, April 2017
Have you ever tried to make heads or tails of the IRS Code? If you have, you have a good idea of what it is now like to file a proof of claim on a mortgage in a bankruptcy. In an obvious response to the last recession and the outcry by consumers to the abuses of mortgage lending, the Bankruptcy Court jumped on the bandwagon of the defenders of the downtrodden debtor. December 2015 saw the creation of the new Form 410A, the so-called mortgage proof of claim attachment. From that time forward, the Bankruptcy Court has required the use of this new form for consumer bankruptcies in chapters 7, 11, 12 and 13 under section 506 of the U.S. Bankruptcy Code.
Why the New Form?
This form is a mechanism for the Bankruptcy Court, the United States Trustee’s Office and all of its chapter 7, 11, 12 and 13 trustees to enter into the accounting realm of the mortgage world. It was designed to provide the kind of information necessary for a trustee to take over the accounting function for consumer mortgages that find their way into a bankruptcy. Its purpose is to compel lenders to provide transparent, full disclosure of all aspects of mortgage accounting, including payments, late fees, costs, the provisions of any escrows, as well as the exact calculation of arrearage claims due and owing on the date of the filing of the bankruptcy petition. It was designed to protect the poor debtor who comes out of a chapter 13 bankruptcy after five years only to find out that the mortgage company’s records of what is still owed do not match those maintained by the debtor or trustee in bankruptcy.
Before Form 410A, a mortgage proof of claim was no different than any proof of claim filed in any bankruptcy nationwide. It contained basic information only establishing the amount of the debt, the basis for the debt, any security, the value of that security, any priority for the debt and the nature of any credits to the debt. Such basic information is insufficient to replicate any portion of the accounting of a mortgage obligation.
The new form designates four separate parts requiring significant detailed information.
Part I involves the parties to the transaction, including any servicers and the nature of interest calculations.
Part II requires a full calculation of the outstanding balance, separating interest, costs and fees as well as escrow funds, if they apply.
Part III requires full accounting on any arrearages as of the date of the filing of the petition, again separating escrow funds, interest and fees.
Part IV requires a breakdown of the monthly mortgage payment, including any escrow and payment of insurance.
The rest of the attachment is a detailed loan payment history that is required from the first date of default. This item can be quite simple if the account was current when the bankruptcy was filed, but very complicated if there have been defaults.
Here are the hyperlinks to the United States Bankruptcy Court’s official form, as well as the instructions on how to prepare it:
What are the Risks?
Before the creation of Official Form 410A, the lender was the keeper of the debt. The debtor could contest the accounting, but unless there was a glaring mistake such as the lender missing an actual payment, the debtor was generally beholden to the accounting of the lender.
Because a confirmed chapter 11, 12 or 13 bankruptcy plan represents a binding contract between the debtor and all of its creditors, the lender is no longer the keeper of the debt. If a lender has failed to disclose costs, fees or expenses on 410A, the debtor will not be liable.
Perhaps the most significant risk is in the method of accounting for interest. The filing of the bankruptcy petition and the subsequent confirmation of a plan cures any defaults. If the lender’s accounting system does not take that into account, significant interest will remain due and owing on the lender’s account records, but the debtor will no longer be liable for its payment.
We Can Help
The upshot is that it now takes two or three times as long to prepare a mortgage proof of claim. Failing to prepare it correctly may also subject the creditor to greater pitfalls. If you have any questions about mortgages or the proper filing of a claim, give us a call.
© Terry Jessop & Bitner April 2017