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2.18.4 Misapplication of Payments

Mortgage servicing companies frequently make errors in crediting bankruptcy debtors’ payments and may file motions for relief from the automatic stay when the debtor is current in postpetition payments. This occurs due to the industry practice of crediting payments received to the oldest outstanding installment. The effect is that timely payments received postpetition are treated as if they were late. Although this practice may be appropriate if there is no bankruptcy pending, it is not appropriate in situations in which the prepetition arrears are being paid according to a proof of claim (which may already include late charges for those payments) and the debtor’s chapter 13 plan. Bankruptcy courts have become more forceful in requiring servicers to correct their accounting practices to ensure that payments will be credited in accordance with the terms of confirmed plans.359 Hidden late charges are also a pervasive problem, with payments made to cure a default under a chapter 13 plan miscredited.360

Problems related to the misapplication of payments may not be easily detectable without reviewing loan payment records.361 At a minimum, when a debtor has cured a default, payment records should be reviewed at the close of the case to make sure they reflect the cure. In cases of baseless motions for relief from stay due to errors in misapplying the plan payments, sanctions against the servicer or its attorney may be warranted.362 The bankruptcy courts and the United States trustee also have authority to investigate the practices of a particular servicer whose faulty accounting techniques affect numerous debtors with cases pending in the court.363 Carefully drafted plan terms can also deter the misapplication of payments.364


  • 359 {350} Ogden v. PNC Bank, 2016 WL 1077355 (D. Colo. Mar. 18, 2016) (affirming award of actual damages, punitive damages, and attorney fees when servicer did not properly apply postpetition payments); In re Gravel, 556 B.R. 561 (Bankr. D. Vt. 2016) (sanctioning servicer $375,000 for misapplying mortgage payments and improperly assessing fees); In re Weaver, 2015 WL 4722615 (Bankr. D. Vt. Aug. 6, 2015) (misapplication of payments in chapter 13 case may constitute state UDAP violation); In re Scott, 2015 WL 9986691 (Bankr. N.D. Okla. July 28, 2015) (failure to properly credit payments violated § 524(i)); In re Boday, 397 B.R. 846 (Bankr. N.D. Ohio 2008) (creditor violated plan confirmation order and discharge order by failing to apply portions of debtor’s ongoing postpetition payments to reduce principal balance as if loan were not in default); In re Rodriguez, 396 B.R. 436 (Bankr. S.D. Tex. 2008) (private right of action under section 105 may proceed to remedy servicers’ errors in applying payments contrary to plan terms); In re Myles, 395 B.R. 599 (Bankr. M.D. La. 2008) (debtor may assert claims for breach of contract and stay violation against creditor who improperly treated postpetition payments as if loan was in default); In re Moffitt, 390 B.R. 368 (Bankr. E.D. Ark. 2008) (granting injunction against servicer based on misapplication of payments); In re Payne, 387 B.R. 614 (Bankr. D. Kan. 2008) (imposing sanctions upon servicer who improperly created a postpetition escrow arrearage by applying debtors’ payments to prepetition debt rather than to the currently due monthly installments); In re Hudak, 2008 WL 4850196, at *5 (Bankr. D. Colo. Oct. 24, 2008) (bankruptcy code, not language of deed of trust, determines how ongoing payments will be applied while debtor cures default in chapter 13); In re Collins, 2007 WL 2116416 (Bankr. E.D. Tenn. July 19, 2007) (upon plan confirmation, creditor must update accounting system so that postpetition maintenance of payment installments are treated as contractually current).

  • 360 {351} See, e.g., In re Mattox, 2011 WL 3626762 (Bankr. E.D. Ky. Aug. 17, 2011) (misapplication of payments may constitute a violation of the automatic stay); In re Jones, 366 B.R. 584 (Bankr. E.D. La. 2007), rev’d in part on other grounds, 391 B.R. 577 (E.D. La. 2008); Nosek v. Ameriquest Mortg. Co., 363 B.R. 643 (Bankr. D. Mass. 2007), vacated on other grounds, 544 F.3d 34 (1st Cir. 2008); Debtors Force Mortgage Servicer to Remedy Chapter 13 Violations, 12 NCLC REPORTS Bankruptcy and Foreclosures Ed. 43 (Mar./Apr. 1994).

  • 361 {352} See In re Wines, 239 B.R. 703 (Bankr. D.N.J. 1999) (example of case reconciling payments made and proof of claim).

  • 362 {353} See In re Taylor, 655 F.3d 274 (3d Cir. 2011) (misleading statement in motion for relief from stay would support sanctions); Ogden v. PNC Bank, 2016 WL 1077355 (D. Colo. Mar. 18, 2016) (affirming sanctions for violations of the stay when servicer did not credit payments properly and incorrectly assessed fees); In re Gravel, 556 B.R. 561 (Bankr. D. Vt. 2016) (sanctioning servicer $375,000 for misapplying mortgage payments and improperly assessing fees); In re Wilson, 2011 WL 1337240 (Bankr. E.D. La. Apr. 7, 2011) (granting motion for sanctions based on the filing of “sham” default affidavits by default service provider on behalf of law firm and servicer in stay relief proceedings); In re Schuessler, 386 B.R. 458 (Bankr. S.D.N.Y. 2008) (ordering creditor to pay attorney fees and debtors’ costs and barring recoupment of any costs as a result of filing of unwarranted motion for relief from stay); In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008) (servicer filed baseless motion for relief from stay, but denying sanctions absent clear and convincing evidence of bad faith); In re Ulmer, 363 B.R. 777 (Bankr. D.S.C. 2007) (awarding sanctions and finding that affidavits of default related to motions for relief from stay were not executed before a notary public as indicated in the document, and affidavits may not have been reviewed and signed by attorney who purported to have signed the paper); In re Allen, 2007 WL 115182 (Bankr. S.D. Tex. Feb. 9, 2007) (memorandum opinion regarding sanction of creditor’s attorneys) (finding sanctions under Rule 9011 warranted against creditor’s counsel for failing to perform an adequate investigation prior to filing pleadings); In re Thompson, 350 B.R. 842 (Bankr. E.D. Wis. 2006) (servicer failed to identify allegedly missed payments on which affidavit of default was based); In re Rivera, 342 B.R. 435 (Bankr. D.N.J. 2006), aff’d, 2007 WL 1946656 (D.N.J. June 29, 2007) (sanctioning individual attorney and law firm for submitting presigned certifications in support of relief from stay); In re Gorshtein, 285 B.R. 118 (Bankr. S.D.N.Y. 2002); In re Kilgore, 253 B.R. 179 (Bankr. D.S.C. 2000).

  • 363 {354} See, e.g., In re DeShelter, 453 B.R. 295 (Bankr. S.D. Ohio 2011) (U.S. Trustee had authority to conduct Rule 2004 examination with respect to proof of claim filed by mortgage creditor); In re Borrows, 2011 WL 721842 (Bankr. W.D. Wash. Feb. 22, 2011) (U.S. Trustee had standing to object to mortgagee’s proof of claim); In re Wilson, 413 B.R. 330 (Bankr. E.D. La. 2009) (U.S. Trustee had standing to make discovery requests in connection with allegations that servicer filed false default affidavits in stay relief proceedings); In re Stewart, 2009 WL 2448054 (E.D. La. Aug. 7, 2009) (ordering Wells Fargo to provide court with accountings for pending chapter 13 cases after finding that servicer failed to notify debtors of payment changes and misapplied debtors’ payments to prepetition and postpetition charges); In re Countrywide Home Loans, Inc., 384 B.R. 373 (Bankr. W.D. Pa. 2008) (U.S. Trustee had good cause to order lender to appear for inquiry into its proof-of-claim practices in pending cases); In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008) (U.S. Trustee had authority to investigate activities of loan servicer and its counsel).

  • 364 {355} See National Consumer Law Center, Home Foreclosures § 9.4.7 (2019), updated at; Newcomer v. Litton Loan Servicing, L.P., 438 B.R. 527 (Bankr. D. Md. 2010) (ordering servicer to recalculate money due on mortgage, including removal of postpetition obligation used to pay prepetition escrow deficiencies). See also Home Direct Funds v. Monroy (In re Monroy), 650 F.3d 1300 (9th Cir. 2011) (discussing plan addendum dealing with, among other things, the application of payments); In re Nosek, 544 F.3d 34, 48–49 (1st Cir. 2008) (chapter 13 plan may set procedures requiring notice of creditor’s assessment of fees and payment changes, require proper allocation of payments, and have method for court to resolve disputes, but debtor’s plan in this case lacked specificity to enforce such obligations under section 105(a)); In re Poff, 2012 WL 7991472 (Bankr. S.D. Ohio Mar. 16, 2012) (discussing plan provisions designed to address the problem of misapplied payments). But see In re Russell, 458 B.R. 731 (Bankr. E.D. Va. 2010) (rejecting detailed language in plan describing how payments should be applied as unnecessary and misleading); In re Carlton, 437 B.R. 412 (Bankr. N.D. Ala. 2010) (language in plan addressing misapplication of payments unnecessary or improper). See generally John Rao, A Fresh Look at Curing Mortgage Defaults in Chapter 13, 27 Am. Bankr. Inst. J. 14 (Feb. 2008) (proposing chapter 13 plan provisions that specifically direct the allocation of postpetition payments in accordance with plan and code).