Best Practice in Bankruptcy Notices of Default
The mortgage industry is under tremendous scrutiny from the Attorney General and the States' Attorney Generals, as well as the new Consumer Financial Protection Bureau which just announced it will be drafting rules to regulate all servicers. In response, most in the industry are stepping up and being more transparent in their communications with borrowers. A lesser thought of, but important way to do this is in Notices of Default in Chapter 13 bankruptcies.
In Chapter 13, motions for relief from stay are commonly resolved by a provisional order for relief. Essentially, the debtor agrees to repay a post-petition default in a manner and by a date certain, and simultaneously maintain current payments to a secured creditor. If the debtor defaults on any of the terms, the stay is automatically lifted should the debtor fail to cure the default within a certain period of time after a Notice of Default is sent.
In some jurisdictions, it is acceptable to give a lump sum for the default in the Notice with no other details. Going forward, the best practice will be for lenders and servicers to provide their attorneys with a detailed payment history showing the default. Attorneys, in turn, should then provide detailed information in the Notice as to the dates, amounts and nature of the default.
If the default is not cured, and the court requires an Affidavit of Default or Notice of Default to be filed to spring the relief from stay, the best practice is to include the same detail as in the Notice.
This detail in the Notice will show good faith towards the borrower and alleviate any challenge to the Notice for lack of detail and disclosure, while putting the lender or servicer in a good light.