Chapter 13 Mortgage Mediation Seminar Reports Program Success

Last month I attended a seminar about mortgage modifications in Chapter 13 bankruptcy. There were several points that warrant a series of blog posts.

One speaker compared mortgage mediation in the context of a Chapter 13 bankruptcy with mortgage mediation in a state court foreclosure. He explained why the homeowner usually has a better chance to save his home by filing Chapter 13 and requesting mortgage mediation.

The speaker stated that only four percent of state court mediation results in permanent loan modification whereas about 60% of bankruptcy court mediation produces a permanent loan solution. Many homeowners have two or more mortgages on their home; state court mortgage mediation affects only the mortgage foreclosed. Modification of a first mortgage, for example, does not change junior mortgage payments. Chapter 13 “strips” off unsecured second mortgages. A modified first mortgage together with a stripped second mortgage provides greater financial relief to the homeowner. Also, Chapter 13 bankruptcy reduces credit card payments, and reduction of unsecured debt payments makes it easier for homeowners to afford a modified mortgage.

Even mortgage companies fare better in a bankruptcy. Even though a Chapter 13 plan provides the stripped second mortgage, credit card lender, and other unsecured creditors a much reduced payback, these creditors at least get some money through the bankruptcy. A foreclosure often leads the homeowner to file Chapter 7 bankruptcy in order to wipe out 100% of his debt.