An Alternative Approach to the RESPA Versus Chapter 13 Bankruptcy Unpaid Pre-Petition Escrow Amount Debate

• Author: Michelle A. Halverson
• Position: J.D. Candidate, The University of Iowa College of Law, 2013
• Pages: 1707-1730

1707

An Alternative Approach to the RESPA

Versus Chapter 13 Bankruptcy Unpaid

Pre-Petition Escrow Amount Debate

Michelle A. Halverson

ABSTRACT: Under the terms of the parties’ loan documents, a lender may

collect escrow funds to make the borrower’s future tax and insurance

payments. Understandably, when a borrower misses escrow payments, the

escrow account may not contain enough funds for the lender to make the tax

and insurance payments. Outside of bankruptcy, the Real Estate Settlement

Procedures Act (“RESPA”) and Regulation X provide the lender procedures

to collect the missed payments. When a borrower files bankruptcy, however,

an automatic stay takes effect. The courts that have addressed this issue

make lenders claim these unpaid pre-petition escrow amounts, allowing

Chapter 13 debtors to pay these missed payments over the life of the

bankruptcy plan and treating the escrow account as current for post-petition

calculations. This Note argues that creditors should not be denied their

RESPA rights for all unpaid pre-petition escrow amounts in a Chapter 13

bankruptcy. The courts have not fully considered the effects of their

decisions. Because lenders must treat post-petition escrow accounts as

current, lenders are forced to make involuntary loans to debtors. This Note

proposes an alternative approach: Courts should evaluate tax and

insurance escrow obligations separately to balance the parties’ interests and

avoid related arguments.

I. INTRODUCTION .................................................................................... 1709

II. TAXES, INSURANCE, AND LOAN PAYMENTS .......................................... 1712

A. LOANS WITHOUT ESCROW ARRANGEMENTS ..................................... 1712

B. LOANS WITH ESCROW ARRANGEMENTS ............................................ 1714

C. REAL ESTATE SETTLEMENT PROCEDURES ACT ................................. 1715

 J.D. Candidate, The University of Iowa College of Law, 2013; B.S., Mount Mercy

College, 2009. I thank Professor Patrick B. Bauer for his advice and comments on this Note, as

well as the student writers and editors of Volumes 97 and 98 of the Iowa Law Review. I especially

thank my family and husband for their endless support.

1708 IOWA LAW REVIEW [Vol. 98:1707

III. RODRIGUEZ: AN ILLUSTRATION OF THE ARGUMENTS MADE

REGARDING UNPAID PRE-PETITION ESCROW AMOUNTS ...................... 1718

A. BANKRUPTCY “CLAIM” ................................................................... 1720

B. ANTI-MODIFICATION PROVISION ..................................................... 1723

IV. THE RODRIGUEZ GAPS: UNADDRESSED ARGUMENTS ............................. 1725

A. IS THE ANTI-MODIFICATION PROVISION INAPPLICABLE? ................... 1726

B. TREATMENT OF RESPA ESCROW SHORTAGE VERSUS ESCROW

DEFICIENCY .................................................................................... 1727

C. ADEQUATE PROTECTION ISSUES ...................................................... 1728

D. FORCED LOANS ............................................................................... 1728

V. ALTERNATIVE, MIDDLE-GROUND APPROACH TO THE RESPA VERSUS

BANKRUPTCY CODE DEBATE ................................................................ 1728

VI. CONCLUSION ....................................................................................... 1730