Loss Mitigation Programs in Bankruptcy Court

Loss Mitigation Programs in Bankruptcy Court

by Hon. Cecelia G. Morris

This Emerging Issues Analysis addresses Loss Mitigation Programs. On January 9, 2009, the Loss Mitigation Program Procedures went into effect in the U.S. Bankruptcy Court for the Southern District of New York, setting a court-supervised process in which debtors and holders of claims secured by the debtor's primary residence provide financial information to determine whether a loan modification can be achieved to avoid foreclosure.

The author writes: On January 9, 2009, the Loss Mitigation Program Procedures (the "Loss Mitigation Program") went into effect in the United States Bankruptcy Court for the Southern District of New York. General Order M-364, available at http://www.nysb.uscourts.gov. The Loss Mitigation Program sets a court-supervised process in which debtors and holders of claims secured by the debtor's primary residence provide financial information to determine whether a loan modification can be achieved to avoid foreclosure. See Loss Mitigation Program Procedures VI(A), VIII. The actual loan modification is a consensual agreement attained after good faith participation in the Loss Mitigation Program. The program is designed to help debtors in bankruptcy and their secured creditors struggling in the foreclosure crisis. Since its implementation, more than 300 debtors in the Southern District of New York have modified their home loans and bankruptcy courts in Rhode Island and the Eastern District of New York have adopted similar programs.

Creditors in Crisis. In 2007 and 2008, the number of homeowners facing foreclosure increased dramatically. Les Christie, Foreclosures up 75% in 2007, CNNMoney.com, Jan. 29, 2008, available at http://money.cnn.com/2008/01/29/real_estate/foreclosure_filings_2007/. ) As the foreclosure crisis set in, homeowners would try to contact the holder of their mortgage in an attempt to obtain loan modifications, with little or no success. Most mortgage lenders use loan servicers to collect, monitor, and report loan payments as well as handle property tax, insurance escrows and late payments. Sometimes mortgage companies use one loan servicer for defaulted loans, a different servicer for foreclosures, and yet another servicer when a bankruptcy is filed. Each of these servicers could be assigned the same loan for different purposes. Thus, a homeowner would often not have the correct contact information to reach someone with authority to negotiate a loan modification.

In addition, once in foreclosure or in bankruptcy, the debtor receives many unsolicited "offers" to help with a loan workout, often from less than scrupulous actors. The "real" owner of the debtor's mortgage was often thwarted in an attempt to gather the financial information necessary to determine whether a loan modification is feasible. Rather than expedite loan modifications, these methods of communication created barriers to the process; communication between debtors and responsible decision-makers for the creditors was reported to the Court as being nearly impossible.

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Cecelia G. Morris was appointed United States Bankruptcy Judge for the Southern District of New York and took the bench on July 1, 2000. Judge Morris is a graduate of West Texas State University, and received her J.D. degree from John Marshall Law School. Prior to her appointment to the bench, Judge Morris served as an Assistant District Attorney in Griffin, Georgia, worked in private practice, and served as Clerk of the Court for the United States Bankruptcy Court for the Southern District of New York from 1988 to 2000, the first bankruptcy court to implement electronic filing of original documents via the Internet.

With jurisdiction over six counties in New York's Hudson Valley, Judge Morris presides over a large consumer base in the Poughkeepsie Division of the Southern District of New York. In the past two years, Judge Morris has lead efforts by attorneys representing debtors and secured creditors to implement a model chapter 13 plan and model chapter 13 order. She recently collaborated with other judges and practitioners to develop the Loss Mitigation Program Procedures, effective January 5, 2009, for the United States Bankruptcy Court for the Southern District of New York, the first court-supervised program in the U.S. to address voluntary modification of home loans.

Judge Morris is a frequent writer and lecturer on issues related to bankruptcy.

She is the author of the chapter on electronic filing of the LexisNexis Matthew Bender Collier Bankruptcy Practice Guide treatise. Judge Morris teaches Bankruptcy Ethics at St. John's University's LL.M in Bankruptcy program. She is presently a member of the Administrative Office of the U.S. Courts Bankruptcy Judges Advisory Group, and serves on various other committees to the Second Circuit, the Administrative Office, and to the National Conference of Bankruptcy Judges.