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Bankruptcy Court’s Loss Mitigation Program (Loan Modification Process Made Easier)
Bankruptcy can be a difficult and overwhelming experience for individuals and businesses alike. While it provides a way to eliminate or restructure debt, it also has a significant impact on credit scores and financial futures. This is where loss mitigation comes in.
Loss mitigation refers to the process of reducing or minimizing the losses that creditors or lenders may incur as a result of a borrower's bankruptcy. The goal of loss mitigation is to reach an agreement that is beneficial for both the borrower and the creditor. While not the only option to seek loan modification, it is often the better course of action for debtors seeking to modify their mortgages.
What Happens After Filing for Loss Mitigation?
In bankruptcy cases, loss mitigation can take many forms. This includes loan modification, forbearance, settlement or sale of assets. A request for loss mitigation must be filed at least three days prior to the first date scheduled for the First Meeting of Creditors, or 341 meeting. Once the debtor has requested loss mitigation, creditors must file time objections and responses to the request. Failure to do so may result in the Bankruptcy Court entering a loss mitigation order that is unfavorable to the creditors.
The Loss Mitigation Order provides a schedule of deadlines for the following:
- Contact information to be exchanged;
- Creditor to contact Debtor;
- Creditor to request information and documentation from Debtor;
- Debtor to provide requested information and documentation to Creditor;
- Conferences; and
- Completion of the Loss Mitigation Process.
Types of Loss Mitigation
One common option is loan modification. This is where the borrower and the creditor work together to modify the terms of the original loan to make it more affordable for the borrower. For example, the creditor may agree to reduce the interest rate or extend the repayment period.
Another option is forbearance, where the creditor agrees to temporarily suspend or reduce payments for a period of time. This can give the borrower some breathing room to get back on their feet and catch up on payments.
In some cases, a creditor may be willing to accept a partial payment or settle the debt for less than the full amount owed. This can be a win-win for both parties, as the creditor gets some of their money back and the borrower gets some relief from their debt burden.
Loss mitigation can also involve the sale of assets. In some cases, a borrower may be required to sell assets to repay creditors. Loss mitigation can help ensure that the assets are sold at a fair market value and that the proceeds are distributed fairly among creditors.
The 2019 Amendments
In New Jersey, a December 17, 2019 order from the Board of Judges of the United States Bankruptcy Court for the District of New Jersey released amendments to the loss mitigation program and procedure. These amendments included the following:
- Loss Mitigation is limited to loan modification or refinance;
- Loss mitigation is no longer available in chapter 7 cases;
- The definition of real property is no longer limited to a principal residence;
- Denial of loss mitigation within a specific time period may be grounds for an objection;
- Adequate protection payments must be made in the proposed loss mitigation order;
- Parties may consent to extension or termination of the loss mitigation period;
These amendments provide a more streamlined loss mitigation process, while removing the ability entirely from chapter 7 cases.
Effect of Loss Mitigation Order
The entry of a loss mitigation order has multiple effects on the rest of the bankruptcy case. If a motion for relief from the automatic stay pursuant to section 362(d) is pending when a loss mitigation order is entered, the Court may condition the say upon compliance by the debtor with the fulfillment of the loss mitigation order. Failure to comply may terminate the loss mitigation order coupled with allowing a creditor to obtain relief from the stay.
A loss mitigation order in a chapter 13 case will also allow the trustee to recommend the entry of an “Interim Confirmation Order” which allows distribution to administrative, priority and secured claims. Often this will also call for the payment of arrears and adequate protection to creditors.
Finally, a loss mitigation order is subject to the rules of Federal Rule of Evidence 408. This rule covers compromise offers and negotiations and excludes any discussions or evidence submitted in furtherance of a settlement or compromise. This protects both the debtor and creditor by allowing them to seek negotiations and settlements without the concern of the information being shared negatively affecting the case, should the negotiations be unsuccessful.
Duties of Loss Mitigation Parties
The Bankruptcy Court does require certain obligations of the parties participating in loss mitigation. For instance, both parties must negotiate in good faith. This means both parties must be willing to compromise and suggest agreements that are reasonable to both parties. Failure to do so may result in sanctions.
Next, debtors must make adequate protection payments to the creditor in an amount that is at least 60% of the monthly principal and interest payment plus 100% of any required monthly escrow payment. If the creditor objects to the amount offered in adequate protection, they must file a notice and the Court shall hold a hearing to consider the objection.
Loss mitigation parties must also file the Loss Mitigation Final Report within 14 days from the termination of the loss mitigation period. Finally, all loss mitigation parties must seek the approval of the Bankruptcy Court for any settlement agreement reached.
The key to successful loss mitigation is communication. It's important for borrowers to be upfront and honest with their creditors about their financial situation. This can help creditors understand the borrower's needs and work with them to find a solution.
It's also important for borrowers to seek professional guidance when navigating loss mitigation in bankruptcy. An experienced bankruptcy attorney can help negotiate with creditors and ensure that the borrower's interests are protected.
In conclusion, loss mitigation is an important part of the bankruptcy process. It can help borrowers and creditors reach a mutually beneficial agreement that minimizes losses and helps both parties move forward. With the right guidance and communication, loss mitigation can make a difficult situation a little bit easier to manage.
David L. Stevens
I have a passion for what I do. There are few things I enjoy more than helping good people and viable businesses find solutions to overwhelming debt.
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