Wells Fargo on the hook for violation of bankruptcy notification law

Wells Fargo will reportedly be setting aside $81.6 million to put an end to legal action involving claims that the bank failed to alert borrowers going through bankruptcy that their mortgage payments would be increasing. Wells Fargo admitted that this happened over 100,000 times between December 2011 and March of this year.

The oversight is a violation of a 2011 bankruptcy law which requires lenders to notify homeowners when there are any changes in their mortgage payments. Specifically, debtors who file for Chapter 13 bankruptcy are supposed to be provided proper notice at least 21 days before their mortgage payments are raised. Initially, over half of the settlement money will go to benefit homeowners who did not receive notification, while another chunk of the settlement money will go to homeowners after their bankruptcy cases are complete. Some of the settlement money is set aside for those whose escrow accounts were not properly managed and who ended up overpaying the bank.

Chapter 13 bankruptcy, as readers may know, is the form of bankruptcy debtors are more likely to file for if they hope to keep their home. What makes Chapter 13 bankruptcy desirable for saving one’s home is that debtors do not pay back creditors by selling off their assets but by coming up with a repayment plan supervised by the bankruptcy court. Typically, the repayment plan lasts between three and five years, at the end of which a debtor is typically able to discharge any outstanding debts and complete the process.

By contrast, Chapter 7 bankruptcy requires that debtors liquidate nonexempt assets and use the proceeds to pay back creditors. In our next post, we’ll take a close look at what is involved in Chapter 7 bankruptcy and how home ownership factors into the process.