Voided Mortgages in Bankruptcy

      Currently the hottest issue in Bankruptcy law, at least here in Nashville, TN, is stripping mortgages from a person's home. In order for any creditor to be paid in a Chapter 13 bankruptcy, the creditor must file a Proof of Claim. For unsecured creditors, such as credit cards and medical bills, the creditor merely has to file a Proof of Claim form and they are entitled to payment, and it is the burden of the debtor to rebut the presumption that he owes that debt. However, for creditors with collateral securing their loan, such as mortgages and car liens, the creditor must attach with their Proof of Claim, documentation that proves the claim is in fact secured. So for a mortgage, the bank with the mortgage must attach the Deed of Trust and the Promissory Note.

       Now, the collapse of the housing market for the past five years has unveiled many “mistakes” and “errors” of the banking mortgage industry. Once a homeowner signed a mortgage with a local bank or even a national/global bank, many of those mortgages were bundled, sold, and traded multiple times. However, the actual physical documents that were signed cannot be found because many of these transactions were done electronically. Therefore, in Bankruptcy Court, when the Proof of Claim for a mortgage is filed and the documents are not attached, or the documents attached have the name of a different bank on them, then the claim gets disallowed. Subsequently, section 506(d) of the Bankruptcy Code provides that to the extent that a secured claim is not allowed the lien securing that claim on the property is void. Thus, if the Bank cannot prove that they own the mortgage with a Deed of Trust and Promissory Note then the claim is disallowed, and then the lien may be stripped.

       Now, for a Bankruptcy attorney, I am going to discuss some strategies when this issue arises. First, the bankruptcy attorney must follow the Proof of Claims Deadline. When we receive the Notice of the Meeting of Creditors, on it is published the Deadline for Creditors to file Proof of Claims. We mark our calendars for these deadlines. According to our Local Rules, here in Middle Tennessee, the debtor has 30 days beyond this deadline to file a proof of claim on behalf of the creditor. So once this deadline approaches, we check to see if the secured creditors of a case filed their Proof of Claim. If they didn't we file one on their behalf. Obviously, we do not have the Deed of Trust or the Promissory Note, so shortly thereafter the Trustee of the case files a Motion to Disallow that claim. Next, we file with the Trustee an agreed order to hold the funds provided in the plan meant for the mortgagee, that way if the documents arise during litigation, the trustee has been holding those funds so the debtor doesn't fall behind in her payments.

       Now is when we file our adversary proceeding against the alleged mortgagee with the lien to strip the lien pursuant to section 506(d). Also, an attorney must be sure to properly serve the complaint on the bank pursuant to Rule 7004. Another good strategy, is when/if the bank responds with an answer, is to request discovery, production of documents, or subpoena the bank to produce the Note and Deed of Trust. Thus, if the bank cannot provide the documents, then the lien is stripped, or if the bank refuses to supply them, as a strategy to avoid saying the documents cannot be found, then you can ask for sanctions.