Massachusetts Mortgage 150-Day Right to Cure Right and Bankruptcy

July 23, 2013

Massachusetts has a new mortgage law that requires mortgage servicers to send a right to cure notice before foreclosure allowing homeowners 150 days to get caught up on their mortgage. You can read about the details of that new law here. One of the key details is that, during the 150-day right to cure period, a homeowner cannot be made responsible for fees and charges beyond normal late charges. In other word, in a departure from prior law, a homeowner will not be liable for the mortgage servicer’s attorney’s fees during the initial 150 period. The fee provision and the long cure period make this law an important legal development in Massachusetts.

Since the enactment of law, questions have arisen about its effect when a homeowner files bankruptcy. Does a homeowner who has had his personal liability discharged in Chapter 7 and surrendered his interest in the property still have a 150-day cure right? Judge Saris of the U.S. District Court for the District of Massachusetts recently that there was no cure right under these circumstances (Souza v. Bank of America).

This question may seem somewhat academic, because if a homeowner wants to walk away from his home in bankruptcy, why would a cure right be important? That’s partly true, but in this case, the mortgage servicer made two arguments. As the court put it, “Bank of America logically argues that the requirement to issue a right-to-cure notice under Section 35A[2] is inapplicable where the debtor is not in ‘default’ on her mortgage because her personal debt was discharged in bankruptcy. Moreover, defendant points out that Souza surrendered her interest in the property.”

If the first point alone is sufficient to remove the cure right [the discharge of personal liability], this is bad for bankruptcy debtor who tend not to reaffirm mortgages in bankruptcy. However, because a debtor retains a right of redemption in a mortgage despite the discharge of his personal liability in bankruptcy, in general, a mortgagee must still follow state law procedures before foreclosure. There will be opportunities in the future to attempt to distinguish Souza due to the fact that that case has the additional component of surrender. However, Souza is potentially dangerous to Massachusetts homeowners who may not want to lose their 150-day cure right simply by failing to reaffirm a mortgage debt in bankruptcy.