The Forgotten Loans ... Achieving Loss Mitigation in Bankruptcy

by Glen D. Rubin, McCurdy & Candler, L.L.C.

To appear in REO Magazine - February 2004 Edition

Imagine a servicing world where the concepts of bankruptcy and loss mitigation became intertwined. Until recently, many thought this would be impossible. While there are special rules for dealing with borrowers involved in bankruptcy proceedings or for those who have already been discharged, these borrowers may be the best candidates of all for your loss mitigation efforts. All it takes is an open mind, good training and some guidance from experienced bankruptcy counsel.

Here are some reasons why you may want to focus your loss mitigation efforts on your bankruptcy portfolio:

1. More and more borrowers are filing for bankruptcy relief, a trend that looks to continue as the economy remains sluggish and bankruptcy reform legislation remains stalled in Congress.
   
2. The bankruptcy system, itself, is not an effective loss mitigation tool. In the bankruptcy system, there are no repayment plans ordered in Chapter 7 cases. Chapter 13 repayment plans can last for up to 60 months with less than 10 percent of the borrowers actually reinstating the loan.
   
3. There is a penalty for ignoring bankrupt borrowers. Despite what the law is designed to do, it is a proven fact that most borrowers will emerge from bankruptcy further behind on their mortgage than when they entered. Thus, loss mitigation alternatives that might have been available when the case was filed may no longer be feasible when the loan emerges from bankruptcy.
   
4. A carefully worded solicitation to the Debtor and their attorney is sure to draw their undivided attention. In bankruptcy, while the automatic stay generally prevents creditors from continuing to contact the Debtor with respect to collection matters, it does not prevent all communications with the borrower; especially if the communication is non-threatening and could allow the Debtor to emerge from bankruptcy immediately or sooner than expected.
   
5. Bankruptcy laws make disclosure of very helpful financial information mandatory (schedules and statements) and also provide an opportunity to meet with a borrower face-to face (341 creditors meeting).
   
6. In the case of borrowers in Chapter 7, they will emerge from bankruptcy having discharged all of their unsecured debt and, in some cases, having avoided any judgments held against their property by other creditors.
   
7. In the case of borrowers in Chapter 13, the repayment plan required by the Court (effectively a 60 month repayment plan) lacks the creativity and flexibility of many traditional loss mitigation alternatives.
   
8. The public relations aspect must not be overlooked. Judges and Trustees may be a bit skeptical at first, but in the end, they will gain more respect for our industry when they see lenders actually making great sacrifices to keep borrowers in their homes.