Many people consider bankruptcy due to concerns about their house, whether it is a foreclosure or the inability to afford the home in light of other financial obligations. For the individual debtor the choices, depending on a number of circumstances, are a Chapter 7 or Chapter 13 Bankruptcy. Each comes with advantages and disadvantages. In a Chapter 7 if the debtor is not current on the home he/she will likely see a Motion for Relief from the Automatic Stay filed by the creditor. The Chapter 7 debtor, if behind on payments, will almost certainly lose his home if a Motion for Relief is filed. A Chapter 13, known as a reorganization plan, can save the debtor from a Motion for Relief as arrears are paid through the plan; however, this too comes with its own short comings. A Chapter 13, depending on the debtor’s circumstances may offer the ability to reorganize almost every type of debt, even car loans, but does not allow reorganization of a mortgage.
A handful of courts, including the Southern District of New York, have begun to consider alternatives like Loss Mitigation. These courts are realizing that the traditional options may not be sufficient to address the growing housing crisis. In summary, the debtor can request loss mitigation from the court. The court may order this and then the debtor and creditor must enter discussion of loss mitigation. The court may institute deadlines for correspondence, settlement hearings, and even impose settlements. In New York, the creditor may object to the imposition of loss mitigation, however, there are then restrictions placed on the creditors ability to pursue any remedy to lift the stay. There are some small exceptions to this rule, including if the creditor would suffer irreparable harm.
In any bankruptcy, in any jurisdiction, the creditor certainly has the ability to enter into loss mitigation options with the debtor. The Southern District of New York seems to be shifting the balance of complete power from the creditors to a more balanced approach. In many cases, the creditor simply does not have any incentive to negotiate with debtors and unfortunately pursue more traditional options. Loss mitigation programs, if more widely utilized by the courts, could certainly have a large impact on debtors and foreclosure rates across the nation.
As great as this all sounds, there are some potential issues. There is express statutory authority in the Bankruptcy Code that allows the court to employ these measures, in fact, there are specific provisions stating that judges cannot alter the rights of mortgage holders. This may make judges less likely to force the issue and may make creditors more likely to object if the court does try to impose loss mitigation. While the Southern District of New York’s program has survived at least one judicial attack, the best option may be a revision of the bankruptcy code to ensure that all debtors are treated with fairness and reasonable similarity.