“Escrow” is a term that sometimes appears in New York bankruptcy cases. It’s most familiar to homeowners, and its origin is clearly medieval. According to Dictionary.com “escrow” is similar to words like “scrap” or “scroll.” It’s only in the last two hundred years, though, that the term evolved to how it’s used today: a deposit held by a third party until some condition is met. For homeowners, escrow accounts are usually where they send monthly payments that include their mortgage payments, homeowner’s insurance payments, and property taxes. The accounts are operated by mortgage-servicing companies, which relay the payments to the relevant parties. Before discussing the role that mortgage-escrow accounts can play in bankruptcy, for context here are some of the advantages they provide homeowners, i.e. why you might have one.
One, as stated above, mortgage-escrow accounts consolidate payments for borrowers, often without charge beyond servicing the mortgages. Paying multiple bills at once is tedious, even in the era of direct withdrawals, so having one payment is easier to manage than three.
Two, not all of the three big components of the escrow payments are monthly obligations. In particular, homeowners’ insurance and property taxes can be due only once or twice per year. An escrow system can ensure that the needed money is available for the payments, especially when debtors might not save up the money to meet the obligations.
Three, the servicer will automatically make the payments on time without bothering debtors.
On the minus side, debtors don’t gain interest from the money they put into mortgage-escrow accounts. (This is why servicers often store the accumulated funds without charge—they get to invest it themselves.) Also, homeowners may not remember to take on the insurance and property-tax obligations themselves once they pay off their mortgages and close their escrow accounts. Some planning is needed.
But homeowners who have no mortgage obligations are probably not concerned about bankruptcy, much less the role that mortgage-escrow accounts can play in it.
In a chapter 7 case, homeowners’ mortgage-escrow accounts don’t play a role because either they’re current on their mortgages or they’re not and they’re going to leave the home anyway. In chapter 13, by contrast, whether debtors owe prepetition arrearages or post-petition arrearages on their mortgage-escrow accounts can matter.
In the case of a prepetition arrearage, homeowners have not met their required monthly payments to the escrow account. Usually, a bankruptcy court will treat the arrearage just like a normal mortgage arrearage in that it must be repaid in full over the life of the chapter 13 plan, but it incurs no interest. Meanwhile, the debtor must become current on the escrow payments.
Post-petition shortfalls to escrow accounts do not gain any such advantages. Debtors who start falling behind on their payments will need to take steps to modify their plans, convert their cases to chapter 7, or seek hardship discharges.
If your monthly homeowner payments go into a mortgage-escrow account and you’re experiencing financial difficulties, then talking to an experienced New York bankruptcy lawyer can help you strategize your options, particularly if you are interested in keeping the home in chapter 13.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
