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Tila Violation Case Study

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Often in bankruptcy cases, there may be claims that you can assert against your creditors. It is possible that you can even recover money damages from your creditors in your bankruptcy case. I am one of the very few bankruptcy attorneys in this state to pursue cases such as Truth in Lending claims, usury claims, and other claims that are often found in bankruptcy cases. Below are some examples of cases that I have pursued for my clients.

Actual claims litigated in bankruptcy cases!

RESPA VIOLATIONS LEAD TO DAMAGES

Recently, I was successful in having a client’s pre-petition claims used as leverage to strike his pre-petition mortgage arrearages. As a result, he was able to keep his house and have his chapter 13 case go to an early discharge.

In this case, my client was having issues with his mortgage company in trying to determine how much, if anything was owing on his mortgage. I submitted a request for information called a “qualified written request” under RESPA. After the mortgage servicer received the request, it continued to badger the client for payment by making numerous telephone calls. The servicer also ignored my requests for information and initiated foreclosure proceedings.

I filed a chapter 13 bankruptcy case to stop the foreclosure. I also filed an adversary proceeding alleging RESPA violations as well as violations of state debt collection statutes. The case was resolved through a negotiated settlement where the client’s pre-petition mortgage arrears over $15,000.00 which would normally have to be paid through the client’s chapter 13 plan was withdrawn.

By withdrawing the pre-petition mortgage arrears, the debtor is now able to afford his house payment and keep his home.

RETAIL INSTALLMENT SALES VIOLATION LEADS TO UNSECURED CLAIM

In a chapter 7 case, a secured creditor with collateral typically must be paid for that collateral or the collateral is surrendered to the secured creditor. In this case, my client bought a motorcycle from an independent dealer financed through a “Funcard” similar to a credit card/revolving charge account. The creditor retained the title to the motorcycle claiming a lien against the motorcycle, that is, the right to repossess the motorcycle if the client did not pay for it.

State law does not allow a creditor to claim a right to repossess if more than 15% interest is charged on a revolving account. I filed an adversary proceeding against the creditor and the court agreed that there can be no lien. The court also held that wrongfully claiming a lien when you are not allowed to do so is deceptive. The creditor was required to pay the client’s attorney’s fees in getting the lien released as an unfair and deceptive trade practice.

This meant that the client got to keep his motorcycle free and clear when he was expecting that he would have to keep making the payments on it!

VIOLATION OF COURT’S CONFIRMATION ORDER

In a chapter 13 case, our clients were making their mortgage payments directly to the creditor. For some reason (that still has not been adequately explained), the creditor refused to accept payments. As soon as the client would send off a payment, the creditor would mail it back with a refusal letter. We would get it straightened out but a few months later, the creditor would again refuse payments. After the third time of refusing payments, we sued the creditor alleging a violation of the bankruptcy court’s confirmation order. Ultimately, the case settled and the mortgage creditor had to pay $10,000.00 in damages and attorney’s fees.

TRUTH IN LENDING VIOLATIONS LEADS TO MORTGAGE RE-STRUCTURING

My clients were an elderly couple who had a first and second mortgage on their home. They were really struggling with their finances including their credit card payments. I had a difficult time trying to arrange their finances so that they could maintain their house payments and keep their conversion van which was needed because the husband used a wheelchair.

In looking at their mortgage documentation, I found that the second mortgage creditor did not provide to the clients disclosures required under the Truth in Lending Act. I submitted a Notice of Rescission of the mortgage to the creditor to rescind the mortgage. We ultimately resolved the case through a negotiated settlement where the clients’ second mortgage was modified by reducing the principal balance by almost $15,000.00; changed the interest rate from 16.80% to 8% and reduced the payment amount by almost half. After the loan modification, the clients were able to keep their home.

VIOLATION OF THE AUTOMATIC STAY RESULTS IN DAMAGES TO DEBTORS

Under any bankruptcy case, once the case is filed with the bankruptcy court, the automatic stay prohibits a creditor from taking any action against the debtors. In this case, the creditor received several notices of the debtors’ bankruptcy case and even filed documents in the debtors’ case. But six months after the debtors filed their case, the creditor filed a small claims action against them. I filed an adversary proceeding against the creditor asserting a violation of the automatic stay. The case was ultimately tried before the bankruptcy judge who ruled that a wilful violation took place and awarded the debtors money damages and ordered the creditor to pay the debtor’s attorney’s fees. The case is reported at 385 B.R. 133 (2008).

TRUTH IN LENDING VIOLATIONS MEANS NO MORTGAGE

A client’s home had a first and second mortgage on it. He also had a small house in another state that he rented out. His initial plan was to sell the small house and pay off his debts but the house was unlikely to generate enough money to pay his creditors in full. I advised the client to file a chapter 7 and have the bankruptcy trustee sell the house. This way, if the sale of the house did not bring enough to pay all his debts, the remaining balances would be discharged through his bankruptcy case.

In the course of preparing the case, I looked at the mortgage documentation for his current home and determined that significant Truth in Lending violations had occurred. I rescinded the mortgage under the Truth in Lending Act (TILA) and then sued the lender to recover the sums the client had paid on the mortgage. After all was settled (and due to several creditors not filing proofs of claims), the client retained over $6,000; had his second mortgage eliminated and got to keep his small house in another state. His unsecured debts were also discharged through his bankruptcy case.

CHARGING TOO MUCH INTEREST LEADS TO MONEY RECOVERY BY DEBTOR

My clients had signed a promissory note to pay for their child’s after school program. The promissory note had a variable interest rate feature in which the interest rate was fixed a few points over an index like the LIBOR index. This means that if the index rate is 3 and the note states that the interest rate will be 8 points above the index, the interest rate will be 11%. In analyzing the note and the interest rate, we determined that the note violated our state usury laws meaning the creditor charged too much interest. We sued the creditor and recovered twice the interest paid on this note within the two year period prior to filing our lawsuit. The clients recovered almost $1,200.00 and the attorney’s fees were paid by the creditor.

CHARGING TOO MUCH INTEREST MEANS CLIENT RECOVERS EXCESS

Our client was a retired military member who was contacted by some loan company. The loan company said they would lend the client $25,000.00 and would accept payment by an allotment. However, the company wanted the allotment to be $300.00 more per month then what it would take to pay off the loan. This additional money was placed in a separate account and accumulated as the client continued to make his payments. The purpose behind the account was to serve as extra collateral so that if the client defaulted, the creditor would have additional money to seize.

Upon reviewing the documents for this loan, I determined that the lender was charging more interest that what was legally allowed in North Carolina. I sued the lender and another company to whom the lender sold the account (an assignee) in the client’s bankruptcy case. The client recovered almost $25,000.00 which included twice the interest paid over a two year period and the money held in the other account. His obligation to repay the loan was also eliminated through his bankruptcy case.

WRONGFUL ISSUE OF FORM 1099 LEADS TO RECOVERY BY DEBTOR

In another case, our client had filed a chapter 13 case. All of her creditors were notified of the bankruptcy case. One creditor had a lien on the client’s household goods so we filed a motion to avoid the lien. About two years after the case was filed, the same creditor sent the client a letter stating that her debt was still outstanding and that she should pay the debt immediately. The creditor further stated in its letter that it had submitted a Form 1099 with the IRS indicating that the debt was cancelled but that, as stated in the letter, the debt was not forgiven or cancelled and that the client should pay. Needless to say, the client was quite upset and concerned that she may have to pay more taxes because of this Form 1099 going to the IRS.

I sued the creditor alleging violations of the automatic stay and a violation of North Carolina’s Prohibited Acts by Debt Collector that such actions were deceptive and unconscionable. We settled the case prior to an answer being filed and the client got a nice settlement for her trouble.

These are merely examples of some of the cases that we have pursued. We cannot guarantee any similar results in your particular case and we do not represent that we will pursue any or all claims that may exist.

Lawsuits Under the Truth in Lending Act (TILA)

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What Is the Truth in Lending Act?

The Truth in Lending Act (TILA) protects borrowers by requiring banks and other institutions who offer loans to make appropriate disclosures before lending funds. Originally enacted as Title 1 of the Consumer Credit Protect Act, TILA is designed to protect against unfair lending practices. The law benefits general borrowers and homeowners who finance their house purchase with a mortgage or an equity line of credit.

What Unfair Lending Practices Are Covered by TILA?

Under TILA, creditors are protected against the following practices by lenders:

  • Unfair credit billing
  • Unfair credit card practices
  • High-pressure sales
  • Misrepresentations
  • Failure to disclose

How Does the Truth in Lending Act Protect Borrowers?

The Truth in Lending Act protects borrowers by:

  • Requiring full disclose of loan costs and terms
  • Creating the right of rescission (allowing creditors to back out from loans in a limited time)
  • Providing channels for alternative dispute resolution
  • Directing borrowers to put creditors on notice when their mortgage is reassigned
  • Placing caps on high cost mortgages and some types of home equity lines of credit
  • Providing better protections for borrowers’ primary residences secured by loans

What Types of Credit Does TILA Cover?

Here are some types of credit to which TILA applies:

  • Equity line of credit
  • Revolving line of credit (such as a credit card)
  • Mortgages
  • Auto loans

The Truth in Lending Act also restricts lenders’ conditional loans that require borrowers to purchase additional investments. For example, a lender can’t compel you to purchase a life insurance policy in addition to your auto loan.

The Right of Rescission: Suing Under the Truth in Lending Act

While homebuyers have three days to rescind on a mortgage, under federal law, other loans violating TILA may be rescinded much later—even up to three years.

A majority of courts (including the 9th Circuit Court of Appeals) require borrowers rescinding their loans to seek a court judgment and prove TILA violations in court. Borrowers must initiate this lawsuit within a three year deadline. Furthermore, if borrowers rescind, they must pay back the loan principal. Only then do borrowers receive a refund of interest and fees.

Other courts (such as the 3rd and 4th Circuits) clearly create a huge advantage for the borrowers because they do not require borrowers to sue banks to prove TILA violations within the three year deadline. Moreover, they may not even end up paying back the entire loan principal because they can use the letter of rescission and a potential lawsuit as leverage to negotiate for a lower payback amount.

Do You Have a TILA Claim?

The Truth in Lending Act may be triggered in many ways. Here are examples of when you may have a TILA claim:

  • A lender changed the terms of your home equity line of credit without your knowledge and consent.
  • A lender did not provide you with an accurate and truthful rate calculation
  • You are charged hidden or other inappropriate fees that your lender failed to disclose.

If there is a TILA claim, you may have several lawsuit options available, including an individual lawsuit, a counter-suit (if your lender is suing you), or a class action.

When to Seek Legal Advice

If you have been a victim of unfair lending practices or high-pressure sales tactics, you may need advice from an experienced consumer protection attorney. An attorney can help you fully understand your rights under the Truth in Lending Act.

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Last Modified: 01-27-2017 12:37 PM PST

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