Loss Mitigation: The Bankruptcy Process

In our last article, we discussed the Loss Mitigation procedures that occur in the state court as part of the foreclosure process. In addition, Servicers are required to participate in Loss Mitigation within the Bankruptcy Court, once a Borrower files a Bankruptcy Petition. Since the Bankruptcy Court is a part of the federal court system, the process begins anew, regardless of what occurred at the state court mediation.

While a request for Loss Mitigation may be made at any time during which the case is pending in the Bankruptcy Court, Debtors (once a Bankruptcy Petition is filed, Borrowers are referred to as Debtors) are encouraged to request it as early in the case as possible. Once the Debtor has requested Loss Mitigation, Creditors must timely file any objections to the Loss Mitigation request. If the Creditor fails to timely file an objection to the Loss Mitigation request, the Bankruptcy Court may enter a Loss Mitigation Order, which refers the parties to the Bankruptcy Court’s “Loss Mitigation Program,” and schedules conferences similar to those held in state court pursuant to CPLR 3408 (see previous article).

The Loss Mitigation Order provides a schedule of deadlines for:

  1. Contact information to be exchanged;
  2. Creditor to contact Debtor;
  3. Creditor to request information and documentation from Debtor;
  4. Debtor to provide requested information and documentation to Creditor;
  5. Conferences; and
  6. Completion of the Loss Mitigation Process.

Servicers strategy in the Bankruptcy Court Loss Mitigation process is identical to the strategy they should follow in state court. Notwithstanding that they have already gone through the Loss Mitigation process in state court, they must strictly adhere to the deadlines contained in the Loss Mitigation Order and document their “good faith” in again providing forms, following up for missing information, documentation and expeditiously reviewing all applications.

Finally, Servicers may contact Debtors directly during the Loss Mitigation Period, but are stayed from seeking relief from the Automatic Stay provided by Section 362 of the Bankruptcy Code, once a Loss Mitigation Order has been entered. If a motion for relief is already pending when the Loss Mitigation Order is entered, the Bankruptcy Court will adjourn the motion for relief until the Loss Mitigation process has been completed!