Loan Modification and Bankruptcy

Oftentimes homeowners that are in bankruptcy believe that they cannot receive a loan modification as well. That is not true. You can get a modification while in bankruptcy. Most borrowers usually avail themselves of a Chapter 13 bankruptcy. In this situation, the borrower submits a plan to the trustee to pay off debt, including the mortgage arrears, over a set period of time, usually 5 years. Under the plan the borrower will resume paying creditor, including the bank, what was being paid before and in addition, pay the trustee a payment every month to take care of the arrears. The arrears that are being paid to the trustee are not limited to mortgage debt, but can include any arrears for any debt such as car payments, medical bills, etc.
The problem is that the borrower could not afford the mortgage payments before. Now, not only must the homeowner resume paying the mortgage, but has an additional payment every month to the trustee for as long as 5 years. It is obvious this can be unrealistic. The homeowner can apply for a loan modification even under these circumstances. We have accomplished this many times by working with the lender and the bankruptcy trustee. The goal is obtain for the borrower a fresh start with no arrears and a lower mortgage payment. This would result in the Chapter 13 being dismissed with no more payments to the trustee and a lower monthly mortgage payment going forward. Of course, if the Chapter 13 contains debts other than the mortgage, the Chapter 13 will remain open and the payment to the trustee will only involve the non-mortgage debts.

Sometimes the homeowner will have filed a Chapter 7. This is a complete liquidation. What happens here is that the trustee will sell those assets of the debtor according to the bankruptcy law and the law of the state where the property is located. Often times the house will be worth less than mortgage balance. In this situation, since the lender has a first lien position by virtue of the mortgage, only the bank will be paid if the house is sold. In that situation, the trustee would have no interest in the property and allow the bank to do what it wants. In that situation, a loan modification is possible. More than likely the bank would want to negotiate a loan modification rather than foreclose. The bottom line is that a loan modification is possible and even preferable in a bankruptcy situation.


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