I didn’t realize how many people in Southern Maryland had loans serviced by Ditech. Then Ditech filed for Chapter 11 bankruptcy. Now I have been getting calls from a number of my bankruptcy clients. I have even received calls from people that I don’t represent. These people all have the same question, “I got this bankruptcy notice, what do I need to do?”
Most likely the answer is nothing. If you don’t have any claims or suits against Ditech, you can just keep making your payments. The bankruptcy probably won’t affect you.
However, one of the reasons Ditech is filing for bankruptcy is the number of consumer lawsuits they face. Some of these suits allege that Ditech has been failing to credit payments and charging fees that did not apply. For these people this bankruptcy case could cause them problems.
What Is Chapter 11?
But first let’s look at what a Chapter 11 Bankruptcy is. Chapter 11 is a reorganization bankruptcy for companies or people with a large amount of debt. This type of bankruptcy lets a company keep doing business while they pay back some of their debt. The Chapter 11 plan has to pay back more debt than creditors would get paid if the company and its assets were sold off. (See our post What Are The Different Types Of Bankruptcy? for more details)
Many consumer organizations look at this bankruptcy filing as a way for Ditech to keep doing business without having to pay any money on these consumer lawsuits. If Ditech can convince the bankruptcy court that if all of its assets were sold there wouldn’t be enough money to pay off all of the creditors some people may not get paid at all.
Who Gets Paid?
In bankruptcy, debts are put into categories. To understand who gets paid, you have to understand the concept of priority. Certain categories are given priority over other types. For instance:
- Tax debt would get paid before most other debts.
- First mortgages have priority over second mortgages.
- Creditors who have a lien are given priority over unsecured debt.
The problem for consumers who are suing Ditech is they may end up in a category with the lowest priority. As long as Ditech keeps doing business, these homeowners could end up getting nothing.
However, this will take a long time to determine. Chapter 11 cases last years. There will be fights over how much Ditech is worth. Then the Court will have to determine how much debt Ditech has, and how much of its debt they can pay back.
Therefore, if you are just a customer of Ditech, this case may not have any impact on you. If you do have a suit against Ditech this bankruptcy may impact you. This case could determine how much you can collect, or if you can collect at all from Ditech. If you are suing Ditech the lawyer handling your case should make sure to file a claim in the bankruptcy case.
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