Chapter 13 Mortgage Mediation Program Begins: Will It Work?

I’ve posted before about mortgage mediation program in Chapter 13 bankruptcy initiated by the Orlando Division of Florida’s bankruptcy courtsThe program is now in place; the bankruptcy court has issued a standard order to be issued upon request by Chapter 13 debtors requiring mediation with their mortgage lenders.

This past week I had my first experience where a client is filing bankruptcy in order to take advantage of the Chapter 13 mortgage mediation program. This debtor has about $35,000 of credit card debt and an upside down house with two mortgages. He could “strip” his second mortgage in Chapter 13, but even then, he cannot afford the first mortgage payments given his current household income. He qualifies for Chapter 7 bankruptcy which would enable him to wipe out all debts and surrender the house, but he really wants to stay in his house. After considering his bankruptcy options, he has decided to file Chapter 13 bankruptcy and seek mortgage mediation as soon as possible.

This client believes that if he just talk to a mortgage company representative he can work out a modified payment. If mediation reduces his first mortgage payment he can use the Chapter 13 plan to strip his second mortgage and pay part of his credit card debts. If the mediation is not successful this bankruptcy debtor has the option convert to a Chapter 7 bankruptcy and walk away from both mortgages; the Chapter 7 option may motivate the mortgage lenders to be more flexible.

I explained to this client that he can also mediate with his lender in a state court foreclosure proceeding. Florida state courts require mediation during contested foreclosures. The disadvantage of this option is that my client would have to let his house go into default for at least three months before foreclosure would begin, he would have to hire an attorney to defend the foreclosure, and it would be several months after the foreclosure is filed before mediation would be scheduled. In Chapter 13 bankruptcy, mediation will be ordered soon after the case if filed.

Chapter 13 mortgage mediation requires that debtors contribute 31% of their net income to a modified mortgage payment. Also, “mediation” is not the same as “modification.” Chapter 13 bankruptcy cannot force your lender to modify or reduce your mortgage, but it can facilitate discussions with the lender to see if a modification is feasible.