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South Carolina: Consequences for Failing to Comply with Bankruptcy Court Orders Requiring Loan Modification

Posted By USFN, Tuesday, January 10, 2017
Updated: Monday, January 9, 2017

January 10, 2017

by John Kelchner
Hutchens Law Firm – USFN Member (North Carolina, South Carolina)

Over the last two years, the Bankruptcy Court in the District of South Carolina has seen a proliferation of post-confirmation, mortgage loan modifications in Chapter 13 cases. To address this issue, the judges in this District have taken steps to clarify the process of obtaining court approval for these modifications to varying degrees. The most comprehensive process has been outlined by Judge Waites in his Chambers Guidelines regarding Loss Mitigation/Mortgage Modification (LM/MM). His preferred method of debtors obtaining a loan modification is by applying through the Default Mitigation Management LLC (DMM) Portal. This allows the bankruptcy court, as well as counsel for debtors and the creditor, to view the correspondence and documentation submitted between the parties during the loan modification process, thereby enhancing the efficiency of loan modification reviews.

Judge Waites has set forth provisions to enforce compliance with his guidelines, including a requirement that all parties are required to act in good faith throughout the LM/MM process. A recent case, In re Davis, C/A No. 15-05030-JW, slip op. (Bankr. D.S.C. Sept. 6, 2016), provides an example of the ramifications of failing to abide by Judge Waites’ Guidelines. In that case, the debtors moved for an Order Requiring Loss Mitigation/Mortgage Modification, which was entered on November 20, 2015.

On December 4, 2015 the debtors initiated the process by submitting their application through the DMM Portal. The mortgage creditor failed to timely respond to the application by notifying the debtors whether the application was complete or that additional documentation was needed. In the ensuing months, despite the bankruptcy court holding a status hearing in March 2016, the creditor continually delayed in filing responses, which led to earlier provided documents becoming stale, and the debtors having to send multiple applications for review. Ultimately, the creditor denied the debtors’ application on the basis that the investor did not give the contractual authority to the creditor to provide a loan modification offer, rendering the debtors’ efforts over the preceding months to be futile.

The debtors filed a Motion to Enforce the LM/MM Order, asserting that the mortgage creditor failed to act in good faith. The bankruptcy court ruled in favor of the debtors, awarded the debtors attorneys’ fees, and issued a civil contempt sanction. In his opinion, Judge Waites found that the creditor failed to acknowledge receipt of documentation or to timely notify the debtors of further information needed to complete their application. The multiple requests for additional documents led to “unnecessary work and expense for both Debtors and their counsel as most of the documentation was ripe for review when it was originally submitted,” but subsequently expired. Davis, at 13.

More significantly, the bankruptcy court found that the creditor failed to act in good faith by not disclosing that the debtors would not be eligible for any loan modification programs at the beginning of the LM/MM process. This lack of disclosure led the court to maintain that “[t]his case is a prototypical example of the conduct and communication issues which have plagued LM/MM reviews and [has] motivated this and other courts to implement a court-supervised Loss Mitigation and Mortgage Modification Program as a means to encourage transparent and efficient LM/MM reviews.” Davis, at 14-15. Had the creditor disclosed that the debtors would not be eligible for modification at the outset of the process, the debtors would have had more options at that time to cure their contractual arrearage.

This case highlights the urgency with which creditors must address loan modification applications in South Carolina and honor the LM/MM guidelines, specifically the disclosure of the eligibility of the debtors at the initiation of the LM/MM process.

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January e-Update

Note for consideration of the USFN Award of Excellence: This article is not a "Feature."

 

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