The options available to persons needing bankruptcy relief to restructure their debt and who also want a loan modification are government programs, proprietary mortgage industry programs.
Although bankruptcy judges cannot enter orders modifying home mortgages except in a Cram Down/Strip Down situation, they can and do restructure them to permit the borrower(s) to cure and reinstate pre-bankruptcy mortgage defaults over a period of up to 5 years in a Chapter 13 Bankruptcy. In addition, Bankruptcy Judges in the Southern District of New York oversee a bankruptcy court-sponsored Loss Mitigation Program to permit debtors and creditors to attempt to work out a mortgage default with greater transparency and accountability than is often available through mortgage industry loss mitigation programs outside of bankruptcy. The most desired result for a debtor is to obtain an affordable mortgage loan modification.
A loan modification is simply a change that lenders make to the terms of an existing mortgage in order to make the loan current. A modification can lower your interest rate, extend the time you have to repay your balance and/or change your loan type (i.e., from adjustable to fixed). Achieving a more manageable monthly payment is the debtor’s goal, with obtaining a performing loan being the lender’s goal.
Homeowners behind on their payments, or in danger of falling behind, are the top candidates for a mortgage modification, particularly if their financial peril is the result of a demonstrable financial hardship. A non-exclusive list of contributing factors include:
Government loan modifications programs include:
Non-Government loan modification programs: Many mortgage lenders also have their own internal, proprietary modification programs, many of which seem to follow the protocols of the expired HAMP Program. While not universally true, in their quest to come up with an affordable mortgage these proprietary programs seem to (1) calculate the borrower’s monthly income, (1) capitalize all arrearages to obtain a new unpaid principal balance, (3) reduce the interest rate, and (4) if necessary, extend the repayment term of the modified mortgage.
Bankruptcy debtors who wish to pursue loss mitigation in their Chapter 7 or Chapter 13 case may do so by filing a request with the Bankruptcy Court for the Southern District of New York. Unless an objection to the loss mitigation request is filed and granted, the Bankruptcy Court will enter an order directing that loss mitigation go forward and setting deadlines for the accomplishment of certain tasks, including the designation of loss mitigation contact persons, the delivery of an information request to the debtor, and the delivery of the requested information by the debtor to the lender’s contact. The order also sets a period during which loss mitigation is to be completed, subject to later requests for extension, and a hearing date for a status conference on loss mitigation.
The documentation and information you will be asked to provide includes, among other things:
It is not unusual for a servicer to need 60 days to review and make an initial determination on a debtor’s loss mitigation request. Additional information is often requested of the debtor and should be supplied as soon as possible.
Although loss mitigation is not intended to be used as a defense to a lender motion to lift the automatic stay in bankruptcy, during the time that loss mitigation is proceeding, the Bankruptcy Court will not entertain lender motions to lift the automatic stay to permit the commencement or continuation of a state court mortgage foreclosure action.
The feature that sets loss mitigation in the Bankruptcy Court for the Southern District of New York apart from loss mitigation outside of bankruptcy is the provision in the General Order that established the process requiring all parties to participate in good faith and subjecting those who do not to possible sanctions. That is not to say that mortgage servicers do not generally participate in good faith, but rather that the good faith requirement is an incentive for the adequate and timely response to the debtor(s)’s loss mitigation request.
For more information about methods of addressing the problem of defaulted mortgages, you are encouraged to examine our more detailed treatments of: