Home Equity Lender or Servicer: Should I file a Proof of Claim in Bankruptcy?

You are a lienholder or servicer of a home equity loan and you receive in the mail a notice that the borrower has filed for bankuptcy. The notice advises you of a date to file a proof of claim. If you are a home equity lienholder or holder of a reverse mortgage should you file a proof of claim attaching the loan documents, security instrument and a payoff of the loan?

Be careful and check with an attorney before automatically mailing in that proof of claim. Since a home equity lien has no recourse against the bankruptcy estate by filing a proof of claim you could be opening your client up to serious unintended consequences even if the borrower has not alleged a constitutional defect in the loan. Debtors counsel usually review loan documents and look for constitutional violations in a home equity closing documents as a first step towards trying to have the loan forfeited. Some bankruptcy decisions allow borrowers to defend home equity claims based on violations that would be barred if the claim were being litigated in state or federal court. Contact an attorney before engaging in home equity litigation with a borrower in a bankruptcy court. The debtor might have an advantage in that forum.