Failure to file Proof of Claim does not affect validity or amount of mortgage

In Matteson v Bank of America, a 6th Circuit Bankruptcy Appellate Panel decision, the Mattesons filed a Chapter 13 case. They owned two properties, both of which were encumbered by a mortgage held by Bank of America.  Both were current at the time of filing.  The plan provided that the trustee would pay the ongoing mortgage payments and any arrears, but only if Bank of America filed a proof of claim.  Bank of America did not file a proof of claim  The Mattesons completed their case, then filed a complaint to discharge the mortgages because Bank of America did not file a proof of claim.  The bankruptcy court, sitting as a trial court in the adversary proceeding, denied an order of discharge, but reduced the balance on each mortgage by the amount that would have been paid by the trustee had the mortgagee filed proofs of claim.

The court of appeals reversed.  It is well-settled law that security for a debt (a mortgage) survives a bankruptcy filing, even a Chapter 13 where the plan is completed.  Also, the court found no basis in the bankruptcy code or in equity to reduce the balance of the mortgage.  The court held that, if the bank did not file a proof of claim, the bankruptcy code authorized the debtors or the trustee to file a proof of claim on its behalf.  Because the debtors did not do so, the mortgage survived and the debt was not reduced or discharged.

Two takeaways:

1.  A mortgagee should ALWAYS file a proof of claim, even if the debt is current at the time of filing. 

2.  If a mortgagee violates rule no. 1, the Debtor should file a proof of claim on their behalf.

© Steve Sowell 2017