Payment Application

Here’s an all too common scenario that confuses people…

A mortgage company files a motion for relief from stay.  They allege that the debtor is in default for the three most recent months.  The debtor swears that they made their last three payments.  Is the mortgage company lying?

No, just that the presentation of the facts is slightly misleading.  Here’s what’s really going on.

Let’s say that John Doe bought a new house in December 2013.  His first mortgage payment was due January 2014.  He makes payments in the following months:

January 2014
February 2014
April 2014
May 2014
June 2014
August 2014
September 2014
October 2014
November 2014
December 2014
February 2015

At the end of February 2015, the mortgage company says they are missing payments for December 2014, January 2015, and February 2015, even though John made his payments in December 2014 and February 2015.

Payments get applied to the oldest contractual payment that was due.  Therefore…

John’s January 2014 payment was applied to January 2014.
John’s February 2014 payment was applied to February 2014.
John’s April 2014 payment was applied to March 2014.
John’s May 2014 payment was applied to April 2014.
John’s June 2014 payment was applied to May 2014.
John’s August 2014 payment was applied to June 2014.
John’s September 2014 payment was applied to July 2014.
John’s October 2014 payment was applied to August 2014.
John’s November 2014 payment was applied to September 2014.
John’s December 2014 payment was applied to October 2014.
John’s February 2015 payment was applied to November 2014.

And that’s why the mortgage company insists that they are missing December, January, and February.

Therefore, if you ever want to dispute a lender’s accusations that you missed a payment, you must go back and show proof of payments over the entire history of the loan (or, in Chapter 13 Bankruptcy, from the date the case was filed or the last time a default was addressed).  And when that happens, 95% of the time, the borrower realized that they did, in fact, default by 3 months, even though some of the earlier defaults may be a forgotten memory.

This is one of the many reasons I recommend conduit mortgage provisions for my Chapter 13 clients who have defaulted on their home loans.  It’s easier for us to access the information concerning when a default took place.