Foreclosure Mediation and Loss Mitigation Programs in Bankruptcy Law
In many areas of the U.S., bankruptcy courts use foreclosure mediation or loss mitigation programs to help debtors who are facing foreclosure on their homes. These programs may be available only to people filing under Chapter 13, although some districts allow any individual debtor to use them. Mediation and loss mitigation programs usually are not available to people who are facing foreclosures on commercial or investment properties. Some states in which these programs exist include New York, New Jersey, Rhode Island, Vermont, Florida, Indiana, and Wisconsin.
Each bankruptcy court has a list of certain approved mediators, who tend to be attorneys or accountants. If you can agree with the lender, you can choose your own mediator. Otherwise, the court can appoint a mediator for you. Fees for the mediator may be hourly fees or a flat fee, depending on the district, and they will be split between the homeowner and the lender. Since state law does not require the parties in a foreclosure to participate in these programs, their success depends on the willingness of both sides to negotiate. A court will be reluctant to intervene in the procedure if the parties are unwilling to engage in it seriously.
Reasons to Pursue Foreclosure Mediation or Loss Mitigation During Bankruptcy
Filing for bankruptcy prevents a deficiency judgment, even though the mortgage remains on the property. Thus, if the lender takes your home, they will receive only the value of the home, which may or may not satisfy your debt. As a result, the lender may be inclined to work with you on an alternative to foreclosure, since it may be more profitable for them.
Also, if you file for bankruptcy, you can receive a release from any subsequent mortgages on your property if your property is not worth any more than the amount due on the first mortgage. Other low-priority debts can be discharged without payment, which may make it easier to pay off the first mortgage.
Foreclosure Mediation vs. Loss Mitigation
The main difference between foreclosure mediation and loss mitigation is that loss mitigation is a more flexible program that gives the lender and the homeowner a greater range of options. While mediation provides for a third-party mediator to oversee the proceedings, a loss mitigation program may provide a mediator upon request or may not offer this option. Having a mediator can be useful because they offer the perspective of someone with nothing at stake in the dispute and may propose solutions that might not have occurred to either party.
However, there are many parallels between these programs as well. In either program, the lender will designate a certain person to handle the process. This person will have the authority to settle with the homeowner on behalf of the lender. For their part, the homeowner will need to provide documents to the lender before the negotiations get started. These resemble the documents needed for loan modification applications. Both foreclosure mediation and loss mitigation programs usually have a specific timeline within which they must be completed. While they do not always require both sides to participate in person, attorneys who handle these matters feel that participating in person leads to better results.
