Wednesday, June 28, 2017

Three Strikes and Your (Stay's) Out: The Consequences of Serial Bankruptcy Filings

Many clients have contacted us regarding serial bankruptcy filers-people who filed for bankruptcy two or more times. Since 1984, Congress has been attempting to deal with debtors who took advantage of the automatic stay while making few or no payments to their creditors. This month, we’ll look at how the Bankruptcy Abuse and Creditor Protection Act of 2005 (BAPCPA) enhanced penalties for serial filers.

Penalties Affecting the Automatic Stay

  1. Under Section 362(c)(3) of the Bankruptcy Code, if you filed bankruptcy under chapter 7, 11 or 13 and then file another bankruptcy under any chapter of the Code within one year of the dismissal of the first case, there is a presumption that you filed the second case in bad faith, and the automatic stay will expire after only 30 days.

  2. Under § 362(c)(4)(A)(i) of the Bankruptcy Code, if you filed two or more bankruptcies in the previous year, and then file a third bankruptcy, the same presumption of bad faith exists, and the automatic stay will not take effect at all upon the third filing (the “Three Strikes and You’re Out” rule). This limitation does not apply to a chapter 11 or chapter 13 case filed after the dismissal of a chapter 7 case for abuse under 11 U.S.C. § 707(b). You may file a motion with the court and ask for the automatic stay to be imposed, but you must present clear and convincing evidence that you filed the most recent bankruptcy in good faith.

  3. Under § 362(c)(4)(D)(ii) of the Bankruptcy Code, if a creditor filed a motion for relief from stay in the prior case that was pending or had been resolved by terminating or limiting the stay, the new case is presumptively not in good faith as to that creditor. Under Section 9011 of the Federal Rules of Bankruptcy Procedure, the Court may impose sanctions against the debtor or the debtor’s attorney for bad faith filings.

  4. Under § 362(d)(4) of the Bankruptcy Code, on request of a party in interest and after notice and a hearing, the Court shall grant relief from the stay by terminating, annulling, modifying, or conditioning the stay with respect to a stay of an act against real property by a creditor whose claim is secured by an interest in the real property, if the Court finds that the filing of the petition was part of a scheme to delay, hinder, and defraud creditors that involved multiple bankruptcy filings affecting the real property.

  5. Penalties Affecting Discharge

    Although the Bankruptcy Code does not per se prohibit serial filings, it does condition the ability to obtain a discharge based on a subsequent filing within certain time limits, as discussed below.

    Successive chapter 7 cases: Under § 727(a)(8) of the Bankruptcy Code, if you received your first discharge under a chapter 7, you cannot receive a second discharge in any chapter 7 case that is filed within eight years from the date that the first case was filed.

    A chapter 13 case and a subsequent chapter 7 case: Under § 727(a)(9) of the Bankruptcy Code, if your first discharge was granted under chapter 13, you cannot receive a discharge under any chapter 7 case that is filed within six years from the date that the chapter 13 was filed, unless payments under the plan in such case totaled at least 100 percent of the allowed unsecured claims in such case; or 70 percent of such claims; and the plan was proposed by the debtor in good faith, and was the debtor’s best effort.

    A chapter 7 case and a subsequent chapter 11 or chapter 13 case: Under § 1328(f)(1) of the Bankruptcy Code, if your first discharge was granted under chapter 7, you cannot receive a discharge under any chapter 11 or chapter 13 case that is filed within four years from the date that the chapter 7 was filed.

    Successive chapter 13 cases: Under § 1328(f)(2) of the Bankruptcy Code, if you received your first discharge under chapter 13, you cannot receive a second discharge in any chapter 13 case that is filed within two years from the date that the first case was filed.

    If you’ve previously filed for bankruptcy and are contemplating filing again, or if you’re a creditor with a claim against a serial filer, please contact Jim Shenwick.

Monday, June 26, 2017

New York Times: Outside Collectors for I.R.S. Are Accused of Illegal Practices


Raid your 401(k). Ask your boss for a loan, load up on your credit cards, or put up
your house as collateral by taking out a second mortgage.

Those are some of the financially risky strategies that Pioneer Credit Recovery
suggested to people struggling to pay overdue federal tax debt. The company is one
of four debt collection agencies hired by the Internal Revenue Service to chase down
late payments on 140,000 accounts with balances of up to $50,000.

The call scripts those agencies are using — obtained by a group of Democratic
senators and reviewed by The New York Times — shed light on how the tax agency’s
new fleet of private debt collectors extract payments from debtors. On Friday, those
senators sent a letter to Pioneer, the I.R.S. and the Treasury Department accusing
Pioneer of acting in “clear violation” of the tax code.

In the letter, a copy of which was provided to The New York Times, the four
senators, led by Elizabeth Warren of Massachusetts, say that the I.R.S.’s contractors
are using illegal and abusive collection tactics.

In particular, they object to Pioneer’s “extraordinarily dangerous” suggestion that
debtors use 401(k) funds, home loans and credit cards to pay off their overdue taxes.

“Pioneer is unique among I.R.S. contractors in pressuring taxpayers to use
financial products that could dramatically increase expenses, or cause them to lose
their homes or give up their retirement security,” the senators wrote. “No other debt
collector makes these demands.”

On Thursday, in advance of receiving the letter, the I.R.S. said it was
comfortable with the approach its outside collectors were taking. The agency “is
committed to running a balanced program that respects taxpayer rights while
collecting the tax debts as intended under the law,” said Cecilia Barreda, an I.R.S.

The debt collectors are paid on commission, keeping up to 25 percent of what
they collect.

Pioneer instructs its employees to “suggest that liquidating assets or borrowing
money may be advantageous” and to “give the taxpayer ideas on where/how to
borrow,” according to the scripts it submitted to the I.R.S. for approval. If that route
does not work, the scripts show, Pioneer’s collection agents encourage taxpayers to
ask their family, friends and employers for money.

All four of the collection companies hired by the I.R.S. — CBE Group, ConServe,
Performant Recovery and Pioneer — tell debtors that they can set up an installment
plan lasting as long as seven years, two years longer than the span that private
collectors are legally allowed to offer. The code that authorizes the I.R.S. to hire
outside collectors says that they may offer taxpayers installment agreements that
cover “a period not to exceed five years.”

The I.R.S. said that payment plans lasting longer than five years were legal as
long as they were approved by the agency.

“If the taxpayer agrees, and after the I.R.S. approves, the private firm will
monitor payment arrangements between five and seven years,” Ms. Barreda said.

“This process is in accordance with the law and ensures that taxpayers assigned to
the private firms will have the same payment options as taxpayers dealing with the

Others disagree with the agency’s interpretation. Nina E. Olson, the national
taxpayer advocate at the I.R.S., said that the agency was engaging “in legalistic
gymnastics to justify something the law doesn’t allow.”

The I.R.S. is owed about $138 billion, a sum that lawmakers are eager to reduce.

To supplement the agency’s collection efforts, Congress ordered it to hire outside
firms — an approach that was tried twice before, in 1996 and in 2006, and then
abandoned because of cost overruns and concerns about abuses. Lawmakers hope
the new program, which began this year, will yield better results; the congressional
Joint Committee on Taxation estimated that it could net $2.4 billion over the next 10

But consumer advocates, including Ms. Olson, view the project with alarm,
fearing that aggressive collectors will push troubled people to the financial brink and
hound them for payments they cannot afford.

To consumer advocates, the call scripts seem to realize their fears. All of the
collection companies encourage taxpayers who may not be able to fully pay off their
tax bill, even through installments, to make a one-time voluntary payment. Three of
the agencies instruct debtors that “extra payments or higher payments can be
accepted at any time.”

That kind of “give us anything you can” approach is common among consumer
debt collectors, but the government has typically been more measured, weighing
what is owed against what the taxpayer can reasonably afford. When taxpayers
cannot pay their entire bill at once, the I.R.S.’s internal collectors are generally only
permitted to place them into installment plans that will fully resolve their debt.

The idea is that pushing taxpayers to the limit, while temporarily good for the
I.R.S., causes long-term strain on the government over all. No one wins, the theory
goes, when taxpayers wind up on public assistance from settling overdue tax bills.

The I.R.S. does not try to collect from people who make only enough to afford basic
living expenses like food, housing and transportation. (Only one collector,
Performant, had lines in its scripts about how to handle hardship cases. Those
accounts should be marked and returned to the I.R.S., Performant instructed its

Low-income taxpayers make up most of the cases farmed out to the private
collectors, according to an analysis by Ms. Olson. After reviewing the first batch of
files the I.R.S. sent to outside collectors, her office found that nearly a quarter of the
accounts involved taxpayers with below-poverty level wages, and more than half
were taxpayers with incomes of less than 250 percent of the poverty level.

Ms. Olson said she was “deeply concerned” by collectors suggesting that
taxpayers borrow against their retirement savings, take out home loans or increase
their other debts to pay their taxes.

“The I.R.S. may suggest those things, but the I.R.S. is authorized to perform a
financial analysis of a taxpayer’s ability to pay, and it does not collect from taxpayers
where its financial analysis shows doing so would impose a financial hardship,” she
said by email.

Pioneer, a subsidiary of Navient, was effectively fired two years ago by the
Education Department from its contract to collect overdue student loan debt after
the agency determined that it gave borrowers inaccurate information about their
loans at “unacceptably high rates.” Pioneer was sued this year by the Consumer
Financial Protection Bureau, which said it “systematically misled” borrowers.

Navient is fighting the consumer bureau’s lawsuit and has denied any
wrongdoing. It declined to comment on its tax debt collection efforts, referring
questions to the I.R.S. The other three collectors did not respond to questions about
their call scripts.

For its part, the I.R.S. said that it supported its private collectors’ tactics.
The agency “encourages people to look into options for paying their tax debt,
including things such as installment agreements,” Ms. Barreda said in a written
response to questions about the call scripts. “How they pay is a personal choice.
Giving taxpayers ideas of possible borrowing sources to pay their tax liability is
consistent with fair debt collection practices as well as I.R.S. practice.”

But Ms. Warren and the three other Democratic senators who sent the letter on
Friday — Sherrod Brown of Ohio, Benjamin L. Cardin of Maryland and Jeff Merkley
of Oregon — took exception to these collections practices. They particularly criticized
the extended payment offers and the encouragement for debtors to send in “extra
payments,” both of which they said violated the I.R.S. code.

The law “allows collectors to ask only for a payment in full, or an installment
agreement providing for full payment over a maximum period of five years,” the
senators wrote. “When Congress required the I.R.S. to hire private debt collectors to
collect certain tax debts, it did so under strict provisions to ensure that taxpayers
were not put at risk during the collection process, but it appears that Pioneer is not
adhering to these protections.”

The I.R.S.’s last effort to outsource debt collection was deemed a failure by the
agency, which eliminated the program in 2009 and said that its internal staff could
handle the work more efficiently. The program wound up costing the federal
government millions more than it actually recouped from taxpayers.

The latest attempt stems from a 2015 provision, buried in a $305 billion
highway funding bill, that required the agency to outsource some of its collection.
President Trump’s Treasury secretary, Steven T. Mnuchin, said his department
would monitor the effort.

“In general, I am supportive of using outside firms on a contingency basis after
all other means have been used,” he said at a congressional hearing last week. “I
think it’s a balance between making sure the government collects money efficiently
and appropriately with making sure we don’t jeopardize taxpayers.”

© 2017 The New York Times Company.  All rights reserved.

New York Times: Your Credit Score May Soon Look Better


About 12 million people will get a lift in their credit scores next month as the
national credit reporting agencies wipe from their records two major sources of
negative information about borrowers: tax liens and civil judgments.

The change stems from a lengthy crusade by consumer advocates and
government officials to force the credit bureaus to improve the accuracy of their
reports, which are often speckled with errors and outdated information. Those
mistakes can limit borrowers’ access to credit cards, auto loans and mortgages, or
saddle them with higher borrowing costs.

Starting July 1, the three major credit reporting companies — Equifax, Experian
and TransUnion — will enforce stricter rules on the public records they collect,
requiring each citation to include the subject’s name, address and either their Social
Security number or date of birth. Nearly all civil judgments and at least half of the
nation’s tax lien records do not meet the new standards, and will be eliminated from
consumer credit reports.

The change will benefit borrowers with negative public records, but it will also
help thousands of people who have battled, often in vain, to have incorrect
information removed from their files.

“We’ve filed hundreds of lawsuits over this,” said Leonard Bennett, a consumer
lawyer in Alexandria, Va. “Comprehensively fixing it hasn’t been something the
industry has prioritized.”

That began to change two years ago, when a coalition of 31 state attorneys
general cracked down on the credit bureaus and negotiated a deal that required
sweeping changes to their practices. (New York’s attorney general had previously
reached a separate settlement with similar terms.) The credit bureaus have already
made some adjustments, like removing traffic tickets and court fines from their files,
but next month’s changes will have the broadest effects yet.

Around 7 percent of the 220 million people in the United States with credit
reports will have a judgment or lien stripped from their file, according to an analysis
by Fair Isaac, the company that supplies the formula that generates the credit scores
known as FICO.

Those people will see their scores rise, modestly. The typical increase will be 20
points or less, according to Fair Isaac’s analysis. (FICO scores range from 300 to
850. Higher is better; lenders generally prefer people with scores of 640 and above.)

The biggest beneficiaries, consumer advocates say, will be those who are spared
the frustration of trying to fix errors. False matches have been a common problem.

Without the kind of additional identifying information that will now be required, a
court record showing a judgment against Joe Smith can easily wind up on the wrong
Joe Smith’s credit report. (Last week, a California jury awarded $60 million to a
group of consumers who said TransUnion falsely flagged some of them as terrorists
and drug traffickers because it had mistaken them for others with similar names.)

Starting next month, the credit bureaus will also be required to update their
public records information at least once every 90 days.

That change pleases Brenda Walker, a Virginia resident with a pending lawsuit
against TransUnion over the company’s monthslong delay in amending her report to
show that a tax lien had been satisfied.

Ms. Walker said she had been turned down for credit cards, a car loan and a
student loan she tried to take out for her daughter’s education. “It wreaked havoc,”
she said. “My credit score was so damaged from something that had already been
paid and released.”

The flip side of the change, lenders warn, is that some borrowers may now
appear more creditworthy than they actually are.

“This removes information from the picture that our customers get about what a
borrower has done in the past,” said Francis Creighton, the chief executive of the
Consumer Data Industry Association, which represents credit reporting companies.
“If someone has a big bill that they owe, that’s something that should be part of the

But when the two largest credit scoring companies, Fair Isaac and
VantageScore, tested what happens when tax liens and civil judgments are removed,
both found that it did not meaningfully change the snapshot provided to lenders on
most borrowers.

More than 90 percent of people with a negative public record have other
negative information on their credit file, like late payments, according to FICO’s
analysis. VantageScore experimentally tweaked its model to focus on other data
points, like the number of credit cards a borrower has with high balances, and found
that the predictive value was almost identical.

“Not surprisingly, those with civil judgments and tax liens are likely to have lots
of other credit blemishes,” said Ethan Dornhelm, Fair Isaac’s principal scientist.
“These changes aren’t going to bring those people into the tiers where they’re going
to qualify for prime credit.”

As public records disappear from the big bureaus’ reports, other data providers
are eager to step in and fill the gap. LexisNexis Risk Solutions has for years gathered
public records information from about 3,000 jurisdictions around the country and
sold it to the credit bureaus. Now, with that business drying up, the company is
marketing its own Liens and Judgments Report to lenders.

Because LexisNexis is not a party to the credit bureaus’ settlement, it is still free
to sell that information, said Ankush Tewari, a senior director with LexisNexis Risk
Solutions. The company can accurately link people to their public records, even
without identifying information like a Social Security number, with an error rate of
around 1 percent, he said.

As the credit bureaus continue to work through the settlement terms, further
changes are coming. Starting in September, their reports will eliminate medical debt
collection accounts that are less than six months old, a change intended to reflect the
sometimes-lengthy process of sorting out health insurance reimbursements.

Also that month, all data furnishers — the companies that provide information
about consumers to the credit bureaus — will be required to include each individual’s
full name, address, birth date and Social Security number in their reports.

© 2017 The New York Times Company.  All rights reserved.

Monday, June 19, 2017

New York Times: The Car Was Repossessed, but the Debt Remains

By Jessica Silver-Greenberg and Michael Corkery

More than a decade after Yvette Harris’s 1997 Mitsubishi was repossessed, she is still
paying off her car loan.

She has no choice. Her auto lender took her to court and won the right to seize a
portion of her income to cover her debt. The lender has so far been able to garnish
$4,133 from her paychecks — a drain that at one point forced Ms. Harris, a single
mother who lives in the Bronx, to go on public assistance to support her two sons.

“How am I still paying for a car I don’t have?” she asked.

For millions of Americans like Ms. Harris who have shaky credit and had to turn
to subprime auto loans with high interest rates and hefty fees to buy a car, there is no
getting out.

Many of these auto loans, it turns out, have a habit of haunting people long after
their cars have been repossessed.

The reason: Unable to recover the balance of the loans by repossessing and
reselling the cars, some subprime lenders are aggressively suing borrowers to collect
what remains — even 13 years later.

Ms. Harris’s predicament goes a long way toward explaining how lenders,
working hand in hand with auto dealers, have made billions of dollars extending
high-interest loans to Americans on the financial margins.

These are people desperate enough to take on thousands of dollars of debt at
interest rates as high as 24 percent for one simple reason: Without a car, they have
no way to get to work or to doctors.

With their low credit scores, buying or leasing a new car is not an option. And
when all the interest and fees of a subprime loan are added up, even a used car with
mechanical defects and many miles on the odometer can end up costing more than a
new car.

Subprime lenders are willing to take a chance on these risky borrowers because
when they default, the lenders can repossess their cars and persuade judges in 46
states to give them the power to seize borrowers’ paychecks to cover the balance of
the car loan.

Now, with defaults rising, federal banking regulators and economists are
worried how the strain of these loans will spill over into the broader economy.

For low-income Americans, the fallout could, in some ways, be worse than the
mortgage crisis.

With mortgages, people could turn in the keys to their house and walk away. But
with auto debt, there is increasingly no exit. Repossession, rather than being the end,
is just the beginning.

“Low-income earners are shackled to this debt,” said Shanna Tallarico, a
consumer lawyer with the New York Legal Assistance Group.

There are no national tallies of how many borrowers face the collection lawsuits,
known within the industry as deficiency cases. But state records show that the courts
are becoming flooded with such lawsuits.

For example, the large subprime lender Credit Acceptance has filed more than
17,000 lawsuits against borrowers in New York alone since 2010, court records
show. And debt buyers — companies that scoop up huge numbers of soured loans for
pennies on the dollar — bring their own cases, breathing new life into old bills.

Portfolio Recovery Associates, one of the nation’s largest debt buyers, purchased
about $30.2 million of auto deficiencies in the first quarter of this year, up from
$411,000 just a year earlier.

One of the people Credit Acceptance sued is Nagham Jawad, a refugee from
Iraq, who moved to Syracuse after her father was killed. Soon after settling into her
new home in 2009, Ms. Jawad took out a loan for $5,900 and bought a used car.

After only a few months on the road, the transmission on the 10-year-old Chevy
Tahoe gave out. The vehicle was in such bad shape that her lender didn’t bother to
repossess it when Ms. Jawad, 39, fell behind on payments.

“These are garbage cars sold at outrageous interest rates,” said her lawyer, Gary
J. Pieples, director of the consumer law clinic at the Syracuse University College of

The value of any car typically starts to decline the moment it leaves the dealer’s
lot. In the subprime market, however, the value of the cars is often beside the point.

A dealership in Queens refused to cancel Theresa Robinson’s loan of nearly
$8,000 and give her a refund for a car that broke down days after she drove it off the

Instead, Ms. Robinson, a Staten Island resident who is physically disabled and
was desperate for a car to get to her doctors’ appointments, was told to pick a
different car from the lot.

The second car she selected — a 2005 Chrysler Pacifica — eventually broke
down as well. Unable to afford the loan payments after sinking thousands of dollars
into repairs, Ms. Robinson defaulted.

Her subprime lender took her to court and won the right to garnish her income
from babysitting her grandson to cover her loan payments.

Ms. Robinson and her lawyer, Ms. Tallarico, are now fighting to get the
judgment overturned.

“Essentially, the dealers are not selling cars. They are selling bad loans,” said

Adam Taub, a lawyer in Detroit who has defended consumers in hundreds of these

Many lawyers assisting poor borrowers like Ms. Robinson say they learn about
the lawsuits only after a judge has issued a decision in favor of the lender.

Most borrowers can’t afford lawyers and don’t show up to court to challenge the
lawsuits. That means the collectors win many cases, transforming the debts into
judgments they can use to garnish wages.

The lenders argue that they are just recouping through the courts what they are
legally owed. They also argue that subprime auto lending meets an important need.

And collecting on the debt is a critical part of the business. The first item on the
quarterly earnings of Credit Acceptance, the large subprime auto lender, is not the
amount of loans it makes, but what it expects to collect on the debt.

The company, for example, expects a 72 percent collection rate on loans made in
2014 — the year that a used 2009 Volkswagen Tiguan was repossessed from Nina
Lysloff of Ypsilanti, Mich.

With all the interest and fees on her Credit Acceptance loan factored in, the car
ended up costing her $28,383. Ms. Lysloff could have bought a brand-new
Volkswagen Tiguan for $22,149, according to Kelley Blue Book.

When Ms. Lysloff fell behind, the trade-in value on the car was a fraction of
what she still owed. Last year, Credit Acceptance sued her for $15,755.

The strategy at Credit Acceptance, which has a market value of $4.4 billion, is
yielding big profits. The Michigan company said its return on equity, a measure of
profitability, was 31 percent last year — more than four times Bank of America’s

Credit Acceptance did not respond to requests for comment.

Some of the people who got subprime loans lacked enough income to qualify for
any loan.

U.S. Bank is pursuing Tara Pearson for the $9,339 left after her 2011 Hyundai
Accent was stolen and she could not pay the fee to get it from the impound lot. When
she purchased the car in 2015 at a dealership in Winchester, Ky., Ms. Pearson said,
she explained that her only income was about $722 from Social Security.

Her loan application listed things differently. Her employer was identified as
“S.S.I.,” and her income was put at $2,750, court records show.

Citing continuing litigation, U.S. Bank declined to comment about Ms. Pearson.

Auto lending was one of the few types of credit that did not dry up during the
financial crisis. It now stands at more than $1.1 trillion.

Despite many signs that the market is overheating, securities tied to the loans
are so profitable — yielding twice as much as certain Treasury securities — that they
remain a sought-after investment on Wall Street.

“The dog keeps eating until its stomach explodes,” said Daniel Zwirn, who runs
Arena, a hedge fund that has avoided subprime auto investments.

Some lenders are pulling back from making new loans. Subprime auto lending
reached a 10-year low in the first quarter. But for those borrowers already stuck with
debt, there is no end in sight.

Ms. Harris, the single mother from the Bronx, said that even after her wages had
been garnished and she paid an additional $2,743 on her own, her lender was still
seeking to collect about $6,500.

“It’s been a nightmare,” she said.

Copyright 2017 The New York Times Company.  All rights reserved.

Thursday, June 15, 2017

New York Times: Wells Fargo Is Accused of Making Improper Changes to Mortgages

By Gretchen Morgenson

Even as Wells Fargo was reeling from a major scandal in its consumer bank last year,
officials in the company’s mortgage business were putting through unauthorized
changes to home loans held by customers in bankruptcy, a new class action and
other lawsuits contend.

The changes, which surprised the customers, typically lowered their monthly
loan payments, which would seem to benefit borrowers, particularly those in
bankruptcy. But deep in the details was this fact: Wells Fargo’s changes would
extend the terms of borrowers’ loans by decades, meaning they would have monthly
payments for far longer and would ultimately owe the bank much more.

Any change to a payment plan for a person in bankruptcy is subject to approval
by the court and the other parties involved. But Wells Fargo put through big changes
to the home loans without such approval, according to the lawsuits.

The changes are part of a trial loan modification process from Wells Fargo. But
they put borrowers in bankruptcy at risk of defaulting on the commitments they
have made to the courts, and could make them vulnerable to foreclosure in the

A spokesman for Wells Fargo, Tom Goyda, said the bank strongly denied the claims
made in the lawsuits and particularly disputed how the complaints characterized the
bank’s actions. Wells Fargo contends that the borrowers and the bankruptcy courts
were notified.

“Modifications help customers stay in their homes when they encounter
financial challenges,” Mr. Goyda said, “and we have used them to help more than
one million families since the beginning of 2009.”

According to court documents, Wells Fargo has been putting through
unrequested changes to borrowers’ loans since 2015. During this period, the bank
was under attack for its practice of opening unwanted bank and credit card accounts
for customers to meet sales quotas.

Outrage over that activity — which the bank admitted in September 2016, when
it was fined $185 million — cost John G. Stumpf, its former chief executive, his job
and damaged the bank’s reputation.

It is unclear how many unsolicited loan changes Wells Fargo has put through
nationwide, but seven cases describing the conduct have recently arisen in
Louisiana, New Jersey, North Carolina, Pennsylvania and Texas. In the North
Carolina court, Wells Fargo produced records showing it had submitted changes on
at least 25 borrowers’ loans since 2015.

Bankruptcy judges in North Carolina and Pennsylvania have admonished the
bank over the practice, according to the class-action lawsuit filed last week. One
judge called the practice “beyond the pale of due process.”

The lawsuits contend that Wells Fargo puts through changes on borrowers’
loans using a routine form that typically records new real estate taxes or
homeowners’ insurance costs that are folded into monthly mortgage payments.
Upon receiving these forms, bankruptcy court workers usually put the changes into
effect without questioning them.

It is unclear why the bank would put through such changes. On one hand, Wells
Fargo stood to profit from the new loan terms it set forth, and, under programs
designed to encourage loan modifications for troubled borrowers, the bank receives
as much as $1,600 from government programs for every such loan it adjusts, the
class-action lawsuit said. But submitting the changes without approval violates
bankruptcy rules and puts the bank at risk of court sanctions and federal scrutiny.

When a lawyer for a borrower has questioned the changes, Wells Fargo has reversed

Abelardo Limon Jr., a lawyer in Brownsville, Tex., who represents some of the
plaintiffs, said he first thought Wells Fargo had made a clerical error. Then he saw
another case.

“When I realized it was a pattern of filing false documents with the federal court,
that was appalling to me,” Mr. Limon said in an interview. The unauthorized loan
modifications “really cause havoc to a debtor’s reorganization,” he said.

This is not the first time Wells Fargo has been accused of wrongdoing related to
payment change notices on mortgages it filed with the bankruptcy courts. Under a
settlement with the Justice Department in November 2015, the bank agreed to pay
$81.6 million to borrowers in bankruptcy whom it had failed to notify on time when
their monthly payments shifted to reflect different real estate taxes or insurance

That settlement — in which the bank also agreed to change its internal
procedures to prevent future violations — affected 68,000 homeowners.

Borrowers having financial difficulties often file for personal bankruptcy to save
their homes, working out payment plans with creditors and the courts to bring their
loans current in a set period. If the borrowers meet their obligations over that time,
they emerge from bankruptcy with clean slates and their homes intact.
Changing these payment plans without the approval of the judge and other
parties can imperil borrowers’ standing with the bankruptcy courts.

In the class-action lawsuit filed last week, the lead plaintiffs are a couple in
North Carolina who say that Wells Fargo submitted three changes to their payment
plan in 2016 without approval. The first time, Wells Fargo put through the changes
without alerting them, according to the couple, Christopher Dee Cotton and Allison
Hedrick Cotton.

The Cottons’ monthly payments declined with every change, dropping to $1,251
from $1,404.

Buried deep in the documents Wells Fargo filed — but did not get approved by
the borrowers, their lawyers or the court — was the news that the bank would extend
the Cottons’ loan to 40 years, increasing the amount of interest they would have to
pay. Before the changes, the Cottons owed roughly $145,000 on their mortgage and
were on schedule to pay off the loan in 14 years. Over that period, their interest
would total $55,593.

Under the new loan terms, the Cottons would have incurred $85,000 in interest
costs over the additional 26 years, on top of the $55,593 they would have paid under
the existing loan, their court filing shows.

Theodore O. Bartholow III, a lawyer for the Cottons, said Wells Fargo’s actions
contravened the intent of the bankruptcy system. “When it goes the right way, the
debtor and mortgage company agree to do a modification, go to court and say, ‘Hey
judge, modify or change the disbursement on my mortgage.’”

Instead, Wells Fargo did “a total end run” around the process, said Mr.
Bartholow, of Kellett & Bartholow in Dallas. The Cottons declined to comment.

Mr. Goyda, the Wells Fargo spokesman, denied that the bank had not notified
borrowers. “The terms of these modification offers were clearly outlined in letters
sent to the customers and/or to their attorneys, and as part of the Payment Change
Notices sent to the bankruptcy courts,” he wrote by email.

Mr. Goyda said that “such notices are not part of the loan modification package,
or part of the documentation required for the customer to accept or decline
modification offers.” He added, “We do not finalize a modification without receiving
signed documents from the customer and, where required, approval from the
bankruptcy court.”

Mr. Limon and other lawyers say that while the bank may wait for approval to
complete a modification, it has nevertheless put through unapproved changes to
borrowers’ payment plans. According to a complaint he filed on behalf of clients in
Texas, instead of going through the proper channels to try to modify a loan, Wells
Fargo filed the routine payment change notification.

The clients also accuse the bank of making false claims by contending that the
borrowers had requested or approved the loan modifications. In many cases, the
trustees who handle payments on behalf of consumers in bankruptcy would accept
the changes Wells Fargo had submitted on the assumption they had been properly

Mr. Limon represents Ignacio and Gabriela Perez of Brownsville, who say Wells
Fargo put through an improper change to their payment plan last year.

After experiencing financial difficulties, Mr. and Mrs. Perez filed for Chapter 13
bankruptcy protection in August 2016. They owed about $54,000 on their home at
the time, and had fallen behind on the mortgage by $2,177. The value of their home
was $95,317, records show, so they had substantial equity.

In September, the Perezes filed a payment plan with the bankruptcy court in
Brownsville; the trustee overseeing the process ordered a confirmation hearing on
the plan for early November.

But in a letter to the Perezes dated Oct. 10, Wells Fargo said their loan was
“seriously delinquent” and offered them a trial loan modification. “Time is of the
essence,” the letter stated. “Act now to avoid foreclosure.”

Because they were going through bankruptcy, the Perezes were not under any
threat of foreclosure. Mr. Perez said in an interview that the letter worried him, so he
asked his lawyer to investigate.

Then, on Oct. 28, 2016, DeMarcus Jones, identified in court papers as “VP Loan
Documentation” at Wells Fargo, filed a notice of mortgage payment change with the
bankruptcy court. It said the Perezes’ new monthly payment would be $663.15, down
from $1,019.03. In the notice, the bank explained that the reduction was a “Payment
change resulting from an approved trial modification agreement.”

The changes had not been approved by the Perezes, their lawyer or the
bankruptcy court, their complaint said.

Although the monthly payment Wells Fargo had listed for the Perezes was
lower, there was a catch — the same one that showed up in the Cottons’ loan. The
Perezes had been scheduled to pay off their mortgage in nine years, but the loan
terms from Wells Fargo extended it to 40 years. The Perezes would owe the bank an
extra $40,000 in interest, the legal filing said.

“I thought that I was totally crazy, or they were totally crazy,” Mr. Perez said. “I
am 58, in what mind could they think I would agree to extend my mortgage 40 years
more? I don’t understand much maybe, but it doesn’t sound legal to me.”
Mr. Limon quickly fought the changes.

If he had not, Mr. and Mrs. Perez could have faced further complications. The
new Wells Fargo payments were so much less than the payments the Perezes had
submitted to the bankruptcy court that if the trustee had started making the new
payments with no court approval, the Perezes would have emerged at the end of
their bankruptcy plan owing the difference between the amounts. The Perezes would
be unwittingly in arrears, and the bank could begin foreclosure proceedings if they
were unable to make up the difference.

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