Trouble Getting a Mortgage Modification? Get Your Bankruptcy Court to Help!

26 Apr Trouble Getting a Mortgage Modification? Get Your Bankruptcy Court to Help!

Homeowners experiencing financial difficulties can avoid losing their homes by getting a mortgage modification. The trouble many people have is getting their mortgage company to agree to grant them an affordable modification.

Recently, several Bankruptcy Courts have gotten involved in the mortgage modification process. The Courts call it a “loss mitigation program”. The program offers a court structured negotiation between the lender and the homeowner. The court insures that the streamlined negotiation is conducted in good faith by both parties, and can impose court ordered sanctions if a party does not proceed in good faith.

In Bankruptcy Court Districts that have a loss mitigation program, the debtor begins the process by filing a notice that s/he is requesting loss mitigation. This can be done at any time, but often is done in the early stages of their bankruptcy case or in reaction to a motion to lift the automatic stay by the creditor. After the notice of request is made, the bankruptcy court orders terms and deadlines for the loss mitigation process. The court may also set up status conferences to allow the court to monitor the progress and insure that the parties continue to act in good faith.

A bankruptcy case often gives the creditor some incentives to enter into a mortgage modification. A bankruptcy discharge will discharge the debtor’s personal liability for the mortgage. This eliminates the possibility that the creditor can get a deficiency judgment against the debtor, and limits the creditor’s potential recovery to only the value of the property. For the creditor to recover the value of the property, they must foreclose, which is often an expensive and time consuming procedure. The value of the property (and therefore the amount of the creditor’s recovery) often deteriorates during the long foreclosure process.

Another incentive the bankruptcy case gives creditor to enter into a mortgage modification is that the debtor’s other debts, and sometimes second mortgages can be discharged. This will make the monthly mortgage payments more affordable for the debtor/homeowner, and will make a mortgage modification more likely to succeed.

Although there are currently only a few bankruptcy courts that have active loss mitigation programs (including the Southern and Eastern Districts of New York, Districts in Rhode Island and New Jersey), others are considering adopting programs in the near future. The Northern District of New York is planning to inaugurate their loss mitigation program in July.

If your bankruptcy court district does not currently have a loss mitigation program in effect, don’t hesitate to speak with local bankruptcy attorneys, trustees or court personnel to see if they would consider setting one up.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.
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