Loan servicing refers to the administration of a loan, from disbursing the funds to collecting payments and managing the loan until it is fully paid off. But when a borrower files for bankruptcy protection, the role of loan servicing changes and new tools and tactics must be deployed to ensure compliance and the best outcome for the lender.
Loan servicing is typically performed by a third-party loan servicer, although some lenders retain this function in-house. The loan servicer is responsible for ensuring the terms of the loan agreement are followed, such as collecting monthly payments, managing the escrow account, communicating with the borrower, handling the payment processing and performing loan forgiveness.
Loan servicing is an important aspect of the loan process as it helps ensure that the borrower's obligation to repay the loan is fulfilled, and the lender's investment is protected. It also helps to maintain good borrower-lender relationships by providing clear communication and efficient processing of payments and other loan-related transactions.
When a borrower fails to repay their loan as agreed, the loan servicer plays a crucial role in managing the default. The specific actions taken by the loan servicer depend on the terms of the loan agreement and the laws in the jurisdiction where the loan originated. However, some common steps that a loan servicer might take when a borrower is in default include:
- Notifying the borrower: The loan servicer will typically send the borrower a notice of default, informing them that they are behind on their payments and outlining the steps that need to be taken to cure the default.
- Attempting to collect payments: The loan servicer will usually try to work with the borrower to get them back on track with their payments. This may involve setting up a payment plan, negotiating a modification of the loan terms, or referring the borrower to a financial counselor.
- Foreclosure: If the borrower continues to be in default and cannot cure the default through other means, the loan servicer may initiate foreclosure proceedings. Foreclosure is the process of selling collateral (usually a house) to pay off the loan balance.
- Other legal remedies: In some cases, the loan servicer may choose to pursue other legal remedies, such as wage garnishment or a lawsuit, to collect on the loan.
Throughout the default process, the loan servicer is responsible for communicating with the borrower, updating their records, and following the applicable laws and regulations. It's important for borrowers to stay in communication with their loan servicer and understand their rights and responsibilities if they are facing a loan default.
When a borrower files for bankruptcy protection, the loan servicer's role can become complex. The specific actions taken by the loan servicer depend on the type of bankruptcy being filed, the terms of the loan agreement, and the laws in the jurisdiction where the loan originated. However, here are some common steps that a loan servicer might take when a borrower files for bankruptcy:
- Suspending collection activities: Once a borrower files for bankruptcy, the loan servicer must stop all collection activities, including calls and letters, unless they are approved by the bankruptcy court.
- Notifying the court: The loan servicer must notify the bankruptcy court that the borrower has filed for bankruptcy and provide any relevant information about the loan.
- Filing a claim: If the loan is secured by collateral, such as a house, the loan servicer may file a proof of claim in the bankruptcy court to seek repayment of the loan.
- Participating in the bankruptcy proceedings: The loan servicer must participate in the bankruptcy proceedings, including any hearings, and comply with any orders issued by the court.
- Working with the borrower and the court: The loan servicer may work with the borrower and the court to find a solution that allows the borrower to keep their collateral and repay their debts, such as a loan modification.
Lenders and servicers are typically notified that a borrower has filed for bankruptcy protection by the bankruptcy court. When a borrower files for bankruptcy, they must list all of their creditors, including their lenders and servicers, in their bankruptcy petition. This petition is filed with the bankruptcy court and provides the court with information about the borrower's debts, assets, and financial situation.
Once the bankruptcy petition is filed, the court will send a notice to all creditors listed in the petition, including the lenders and servicers. This notice informs the creditors that the borrower has filed for bankruptcy and provides information about the case, including the case number and the name of the bankruptcy judge.
In addition to the notice from the court, the borrower's attorney or the bankruptcy trustee may also notify the lenders and servicers that the borrower has filed for bankruptcy. This notification may be in the form of a letter or a phone call and may provide additional information about the case and the status of the borrower's debts.
It's important for lenders and servicers to promptly respond to the notice of bankruptcy filing and to participate in the bankruptcy proceedings as necessary. By doing so, they can protect their rights and interests in the borrower's assets and ensure that their claims are considered by the bankruptcy court.
What services are available for lenders and servicers to monitor loan portfolios for debtors who have filed for bankruptcy?
Lenders and servicers can use a variety of services to monitor their loan portfolios for debtors who have filed for bankruptcy. Some of these services include:
- Bankruptcy Monitoring Services: These services provide lenders, servicers and law firms with timely updates on new bankruptcy filings and court actions for debtors in their loan portfolios. They can help lenders and servicers stay informed about the status of the cases and respond promptly to any notices or requests from the court.
- Loan Portfolio Management Systems: These systems allow lenders and servicers to track and manage their loan portfolios, including loans that have been affected by bankruptcy. They can provide information about the status of the loan, the current balance, and any recent payments or collections.
- Credit Reporting Services: These services provide lenders and servicers with credit information and updates on debtors in their loan portfolios. This can help them stay informed about changes in the debtors' financial situations, including the filing of bankruptcy.
- Legal Services: Some lenders and servicers may choose to engage legal counsel to help them navigate the bankruptcy process. Legal services can provide guidance on the impact of bankruptcy on the loan and help the lender or servicer protect their rights and interests in the borrower's assets.
Through its AACER platform, Epiq Bankruptcy provides a range of bankruptcy monitoring services to direct lenders, loan servicers, law firms, investors, debt collection companies and more. Its solutions and services for identifying and managing a bankruptcy lifecycle include:
- Identifying new bankruptcy filings daily
- Eliminating bankruptcy mailrooms
- Daily monitoring of open cases for changes in the docket
- Daily monitoring of closed cases for case re-openings or other dispositions
- Providing 24/7 access to a database that includes 37 million+ bankruptcy cases
- Automatically matching trustee payment data
- Proving analytics for new filings, open cases, closed cases and various stakeholders (lawyers, law firms, trustees and judges)
- Providing raw filing and case data
For 20 years, Epiq Bankruptcy – AACER has helped its customers improve their outcomes and mitigate risks associated with a bankruptcy lifecycle. These services can help lenders and servicers manage their loan portfolios effectively in the event of a bankruptcy filing. They can also help lenders and servicers comply with the rules and regulations set forth by the bankruptcy court and ensure that their claims are considered in the bankruptcy proceedings.