Compare how Chapter 7 and Chapter 13 bankruptcy treat a seller-carry private mortgage note: discharge timing, lien survival, the §1322(b)(2) anti-modification rule, and the workflow the holder must run in each case.
A seller-carry holder self-servicing against a paper sub-ledger mailed a late notice and a payoff demand after a borrower's Chapter 13 filing. The §342 bankruptcy notice sat unprocessed for two weeks. Courts applying §362(k) awarded actual damages, attorney fees, and punitive damages that exceeded the note's principal balance - all traceable to the absence of a same-day bankruptcy intake protocol at the servicer level.
A §342 bankruptcy notice on a seller-carry borrower triggers nine defined holder actions — from a day-one communication freeze through proof-of-claim filing, Chapter 13 plan review, and post-discharge posture. Each step ties to a specific federal rule and a specific record in the loan file.
Seven mistakes that put seller-carry note holders at risk when a borrower files bankruptcy — the statute behind each one and the exact protocol to prevent it.
A bankruptcy filing on a seller-carry borrower converts the loan from a state-law servicing matter into a federal proceeding. Here is what private mortgage note holders must know about the automatic stay, proof of claim, chapter-specific lien mechanics, and operational discipline from petition date through case closure.
When a seller-carry holder elects between an impound and non-impound structure, the choice is a risk-pricing decision, not an operational preference. The decision math turns on borrower reserves, property-tax exposure, and property risk classification — and the failure modes on a setback loan are not symmetric.
The questions below cover the impound-account decisions every seller-carry holder faces from the closing table through every annual analysis and the payoff closing-out. The answers point to the federal rule, the state-law analogues, and the operational discipline a clean impound record requires.SetupQuestion one — [...]
A no-impound seller-carry note removes the holder's only structural check on the borrower's property tax payments. When a borrower defers taxes during a cash-flow setback, the holder may not discover the delinquency until the county tax-sale list publishes — by which point redemption costs can substantially exceed the impound cost across the life of the loan.
Setting up an impound account on a seller-carry private mortgage note runs in eight defined steps from the segregated trust account at closing through the §1024.34 closing-out at payoff. Each step ties to a specific Regulation X requirement and a specific record in the loan file.
Seller-carry holders who manage impound accounts without a licensed servicer face seven recurring mistakes - from commingled trust funds to a missed §1024.34 refund at payoff. Each maps to a specific regulatory consequence, and each has a fix that professional servicing handles as routine.
