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Bankruptcy Court Offers "Loss Mitigation" Program
In the current economy, home foreclosures often yield a loss-loss situation for homeowners and lenders. One bankruptcy court has launched an innovative program that tries to help both sides avoid such mutual dissatisfaction.
The U.S. Bankruptcy Court for the Southern District of New York offers “loss mitigation”—a program that encourages debtors who have filed for bankruptcy protection and their secured creditors to sit down and discuss ways foreclosure might be averted.
“The Bankruptcy Code does not allow me to rewrite a residential mortgage,” said U.S. Bankruptcy Judge Cecelia Morris, the program’s primary architect. “But it does allow me to say to both sides that they need to talk, in the hope that they may avert either the loss of a debtor’s property to foreclosure, increased costs to the lender, or both.”
She added: “We tend to describe loss mitigation as mediation without a mediator.”
The program, in effect throughout the Southern District since January, was born out of a 2008 meeting in Morris’ chambers in Poughkeepsie, N.Y., in which some creditors’ lawyers sought permission for some of their debtors to fashion new deals.
“We couldn’t condone varying treatment of debtors, so any such process had to be open to all,” said U.S. Bankruptcy Judge Martin Glenn, who participated in the initial meeting. “We heard from both sides. Then Judge Morris took it from there. She’s done a terrific job.”
The court’s program allows any party in a case to seek loss mitigation. Most lenders have their own in-house loss mitigation programs, but borrowers have complained about not being able to speak to a live person when they call to inquire about utilizing them. (Lenders often are concerned about violating the “automatic stay” federal bankruptcy law imposes on efforts to collect debts from anyone under bankruptcy protection.)
Foreclosure once might have been a good option for a secured lender who could then resell the property. But in today’s economy, the secured creditor might be better served to salvage the mortgage and continue getting payment on it.
As long as it is court authorized, loss mitigation in the Southern District of New York is available to any individual debtor under any chapter of the Bankruptcy Code. But virtually all loss mitigation has occurred in non-business Chapter 13 cases. Either a debtor or a creditor can request loss mitigation negotiations, or the court can order it after the parties have had a chance to object.
“I’ve had six loss mitigation requests so far, and have granted five,” said Judge Glenn, the only judge in his court’s Manhattan division to hear non-business Chapter 13 cases. “In one, the lender objected, and after a hearing, I sustained the objection.”
Glenn hears Chapter 13 cases twice a month, about 50 to 100 cases each of those days. “I’ve been surprised I haven’t had more loss mitigation requests,” he said.
Through March 30, such requests were more frequent in the bankruptcy court’s Poughkeepsie (98 requests) and White Plains (42 requests) divisions.
The loss mitigation process, fashioned by Judge Morris and her career law clerk, Jeff Narmore, is modeled loosely after the Southern District of New York’s mediation program.
“What I think the two programs have in common is the concept that although the parties cannot be forced to reach an agreement, a judge can require those parties to confer with each other in a good-faith effort to resolve, or narrow, the issues,” Narmore said.
“To qualify as a good-faith effort, each of the parties participating in the discussion needs to be accessible to the other and have settlement authority. Both parties are assisted by having an open and definite line of communication, and where a resolution is possible, the time needed to reach agreement may be reduced,” he said.
To request loss mitigation, a debtor must serve notice on the creditor, which then has 14 to 21 days to object, depending on whether the request was in the original bankruptcy plan. A creditor who requests loss mitigation must notify the debtor and debtor’s attorney, who have seven days to object. If no objection is made, the judge sets up a schedule and time-lines for the parties to meet with each other. All the program’s procedures are spelled out on its website, www.nysb.uscourts.gov. Just type “loss mitigation” in the search box.
“We’ve had lawyers for debtors and creditors praise the program,” Judge Morris said. “Both sides have the same interest. The lender doesn’t really want the house, and the homeowner doesn’t want to give up the home. It can be a win-win situation for them to sit down and work out a deal.”