Recent court rulings may have significant impact on how bankruptcy courts handle escrow debts in some Chapter 13 bankruptcy cases. Here’s an overview of the issue and how escrow debts are likely to be handled in future bankruptcy cases.
What Are Escrow Accounts?
Escrow accounts are accounts set aside as part of a mortgage deal to hold money for expenses like property taxes and homeowner’s insurance. In many cases, the mortgage lender or servicer collects escrow money as part of monthly mortgage payments.
How Do Escrow Accounts Affect Chapter 13 Bankruptcy?
When a homeowner falls behind on mortgage payments, she likely also falls behind on escrow payments. This can lead to difficulties paying property taxes and other non-mortgage fees associated with homeownership.
This may become problematic if a person files for Chapter 13 bankruptcy to avert foreclosure, which is fairly common because of the foreclosure-halting powers of the automatic stay. In Chapter 13 bankruptcy cases, the following might happen to escrow accounts:
- Mortgage debts can’t be modified in bankruptcy court. This provision was established decades ago as part of efforts to encourage homeownership among Americans. But for underwater homeowners today, it can mean bankruptcy filers have great difficulty keeping their homes, because it means that homeowners must continue making payments as they agreed in their loans.
- Escrow arrearages are listed in the petition. Overdue escrow payments must be included on bankruptcy paperwork. The good news is that a recent court ruling (in the case In Re Beaudet) asserted that overdue escrow payments accrued before a bankruptcy filing can be considered non-mortgage debts. That means they can be included as part of the bankruptcy repayment plan and repaid over a three- to five-year period, possibly at a lowered interest rate.
- Future escrow debts are undefined. The bankruptcy case did not establish, though, whether missed escrow payments in the period after a bankruptcy case is filed would be considered part of mortgage debts. In other words, those who continue to have difficulty making their mortgage payments after filing for Chapter 13 may or may not be required to make escrow payments in addition to regular loan payments.
For now, Chapter 13 filers may have to rely on case-by-case judge discretion when missed escrow payments are part of a bankruptcy estate. Considering the high number of struggling homeowners, though, it’s possible that bankruptcy court rulings will decide the issue definitively in the near future.