Bankrupt Lenders Prohibited From Wiping Out Borrowers' Right To Sue

A statement has recently been filed with Congress on behalf of the United States Trustee Program in connection with their mission of promoting the integrity and efficiency of the United States bankruptcy system.

Among other things, the statement reports that The Program has been active in enforcing a provision of the bankruptcy statute (11 U.S.C. § 363(o)) , which, in the context of credit transactions to which the Truth in Lending Act applies, prohibits bankrupt lenders from selling off their loan portfolios or other interests “free and clear” of the rights of their customers to assert claims or defenses provided under applicable laws. According to the statement:

• The United States Trustee’s role to enforce [the statute] is paramount because consumer borrowers may not receive notice of the intended sale of their loans. Even if they receive notice, they may not have the financial means to object to the sale or request the sale provisions contain [legally required] safeguards to preserve their rights. To date, United States Trustees have filed pleadings to enforce [this statute] in at least a dozen cases in which bankruptcy sales by lenders did not provide the required and appropriate consumer protection.

(What I guess this means is that, among possibly other things, home mortgage lenders are prohibited from making mortgage loans that violate (blatantly or otherwise) homeowners' rights under consumer protection or other laws, and then file bankruptcy, using the bankruptcy process to (1) wipe out those homeowners' legal rights that the lenders' violated when making the mortgage loan, and (2) subsequently sell off their mortgage loans to other investors, free of the homeowners' ability to enforce those violated legal rights through a lawsuit against a subsequent purchaser of those mortgages.)

Source: The United States Trustee Program: Watchdog Or Attack Dog? (page 5).