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Should I Modify My Home Loan Before or After Filing for Bankruptcy?

When filing for Chapter 7 bankruptcy , one of the common questions I run across with clients is whether they should complete a loan modification prior to filing for bankruptcy or after. The answer to this question depends on your particular factual situation and whether completing a loan modification prior to filing for Chapter 7 bankruptcy, will affect your ability to file. There are a few issues you should be aware of in deciding when to complete your loan modification.

If you have started your loan modification process, but your loan modification has not been completed, then you may wish to complete your home loan modification prior to filing for bankruptcy. If you file in the middle of modifying your home loan, such as during the trial payment period, the lender may require you to restart the loan modification process. This means that the lender will require that you submit your loan modification package again to be reconsidered for a loan modification. If you have worked for a long period of time to complete your home loan modification, then filing for Chapter 7 bankruptcy, may affect your ability to finalize the process.  Lenders will not negotiate to modify the terms of your loan when there is a pending Chapter 7 bankruptcy. The automatic stay results in mortgage lenders stopping the negotiating process, until they receive an authorization letter from your attorney. There are also lenders that will not require that the process be restarted and will continue to work with your during your Chapter 7 bankruptcy, after receiving your attorney's authorization.

If you have not started the loan modification process, then you have the option to file for Chapter 7 bankruptcy and then start the process of loan modification while you are in Chapter 7 bankruptcy. The mortgage company will require that your attorney sign an authorization letter allowing them to contact you in regards to loss mitigation options including loan modification. Once they receive this authorization letter and the documents to begin the loan modification process, they can begin to process your paperwork.

If the loan modification is approved while you are in Chapter 7 bankruptcy, then the mortgage company may require that you obtain a court order approving the modification prior to the finalization of the loan modification. It does not appear that the bankruptcy code supports the idea that a court order of approval is required in order to finalize the loan modification. Many mortgage companies are under the impression that this is required and therefore will require that you obtain a court order if you are in bankruptcy.

The mortgage company may also wait until your Chapter 7 bankruptcy discharge to finalize your loan modification. Once your Chapter 7 bankruptcy case is discharged and closed, then the mortgage company will not require court approval for finalizing the loan modification.

It is important that you consult with a local bankruptcy attorney to determine whether modifying your loan prior to finalizing for bankruptcy is in your best interest. There may be facts in your case that would support filing before or after your Chapter 7 bankruptcy. If you are many months behind in your mortgage payments then filing for Chapter 7 bankruptcy before completing the loan modification process may not be beneficial.

Comments

David, since you did not sign the reaffirmation agreement during your bankruptcy then you should not have personal liability for the rental property mortgage. Banks have generally not made it more difficult to complete a loan modification if you did not reaffirm your mortgage. Some have made it difficult to refinance your property if you did not reaffirm your mortgage.
Angela, my position is that a loan modification does not create new liability and that the debt continues to be discharged in bankruptcy. The loan from my point a view is not a new loan but rather a modification on the preexisting loan terms. This issue has not been litigated, so there is not much case law to go by. Check also your state's anti deficiency laws. These laws stop mortgage companies from seeking a deficiency (difference between what is owed and what the house is worth) against a person if the house is foreclosed upon.
My husband and I filed and were granted a final discharge of a Chapter 7 bankruptcy in Sept 2012. During the process, we discovered we were about $20,000 underwater on our home. Now that was just the opinion of one realtor, but we went with it. We had applied for a home loan mod 3 different times with BOFA (I know..crappy company!) and turned down because our pmnt, taxes and ins were not over 31% of our income. The deal is the house needs some work and being underwater means the money we put into it, we likely won't get back out of it. :( Since the Chap 7 BK relieved us of our financial obligation on the home loan, we quit paying on the house and have been looking for something to rent. Bad thing is, landlords don't like our story..giving back a house, filing chap 7 bk. It's crazy! They act like we are the only one they've ever heard of doing this sort of thing! At any rate, we refilled for a 4th time for a modification. We got approval papers with 3 trial payments to be made but it's no different than what we are currently paying! They've just tacked on the $9000 we were behind on payments to the existing loan. So it puts us back at day one what we owe on the property! Like we've been renting it, basically! (Ouch!) But what I want to know is if I pay the 3 trial payments and then get the final mod docs, sign them and move forward with the modification, (which keeps my interest rate from adjusting every 6 months) am I then back on the hook for the loan again? Can't ever get out of it? Couldn't walk away down the line if we decided it wasn't worth it to stay? Or is it still a discharged debt in the eyes of the court?
Thank you!
Oz, You may be able to get a fee waiver if you qualify. Go to the following website and see if you qualify for a fee waiver that would allow you to file your answer without having to pay the fees to file the documents: http://www.courts.ca.gov/selfhelp-feewaiver.htm
JR, You can submit your paperwork but there is no guarantee that they will be willing to modify your mortgage at this point. I would suggest you talk to a qualified Chapter 13 bankruptcy attorney to examine your options. The attorney will be able to examine whether filling for bankruptcy is a good option or even a feasible option at this point. You may well want to consider Chapter 7 bankruptcy if Chapter 13 bankruptcy is not an option. If you have other debt to eliminate you may be able to file Chapter 7 bankruptcy to stop the foreclosure of your home and have more time to work on a loan modification.
Just looking for advice. I'm 8 months behind on my mortgage and in foreclosure.
I requested my mortgage co. for a loan mod. 2 years ago and was denied. I finally asked again last week and they sent all the paper work for the loan mod application. I have 30 days to get all the requested info back to them for review. Should I send in the requested info and risk losing my home in foreclosure while I wait for a decision, or should I file for chapter 13 bankruptcy. I really want to keep my home.
I am in California. I had my rental property discharged in Chap 7 last year. In the "Statement of Intention" in indicated with checkmarks that I was retaining and reaffirming the property debt. But I never received the actual reaffirmation agreement for me to sign.

Now because of our recent job losses, I want to modify this loan so we can reduce the monthly payments. Am I personally responsible for the discharged debt, and will this affect my request for the loan modification?
Yvonne, there is nothing lost with making a last effort to modify your home mortgage. Of course there is no guarantee that a loan modification will be granted, since their is nothing that requires that the lender modify your mortgage. Most mortgage companies grant modifications regardless of the second mortgage on the house. The Chapter 7 bankruptcy took care of your second mortgage in the sense that you do not have personal liability on the mortgage (assuming no reaffirmation was signed) but it is still a remaining lien on your home. Eventually you will have to deal with the second if you intend to keep the home.
I will try to make this brief.....We live in California, and have a foreclosure date approaching on our home within 30 days. We have applied for a loan modification 3 times within the last two years (last one approximately one year ago), and were denied, in addition we have not made our mortgage payments within the two years. In July 2012 our chapter 7 bk was discharged, and we did not reaffirm our mortgages. Because of the denial of the loan modifications we opted to short sell the home but have run into many problems with the banks not agreeing to payoff amounts, buyers cancelling etc....This may sound crazy but I have to ask.....is it worth applying one last time for a loan mod with the hope of saving our home? Could Chase (1st mtg) loan modify without the second? As the second was covered in the chapter 7, however they have a lien on the home? Not sure if we should attempt.....or walk away. Please advise.
Maria, you are protected by the automatic stay while you are in Chapter 7 bankruptcy. If you are current on your mortgage or have a loan modification approved and continue to make the regular agreed mortgage payments then you will be able to keep your home assuming there are no other issues in your bankruptcy. If you eventually default on your mortgage payments in the future then the bankruptcy will not protect you from having the house foreclosed on if you fail to make the payments.
I have my BK 7 discharge in June and now my home loan modification is in the process of review. My BK lawyer said, that our house is protected by our BK eben after discharge. I am very confused after he said that. How is BK can protect our house even after discharge. We are in default now in our mortgage loan. We were current when we are filing for BK even when it was discharge. ..... Pls help.
I have had numerous clients obtain loan modifications after their bankruptcy discharge. Simply having a bankruptcy discharge does not mean that the lender will not work with you to modify your loan. The fact that you had your loan modified previously does not mean necessarily that the lender will not modify your loan again.
If a loan modification was applied and approved just prior to the BK7 discharge in October 2008, is there anything preventing another modification. Perhaps the answer is within the lender guidelines....Please Advise...
My position would be that the loan modification did not create any new loan and therefore the loan was discharged as part of the bankruptcy if no reaffirmation agreement was signed. Therefore any signed loan modification after filing for bankruptcy should not be treated as creating a new loan or new liability. You did not reaffirm the loan therefore I would argue that the mortgage loan has been discharged as part of the bankruptcy.
I live in California and started a request to modify my morgage in 2009 within 6 months with no loan mod I filed chapter 7 and received a trial modification before BK was discharged in 2010 in July. Lender did not contact my lawyer about modification or reafirming prior to discharge which I was unaware of at the time. At time of discharge I was still paying morgage on trial level. Four months after discharge the lender came to me with final modification that only took back payments and fees and moved them to end of loan terms. They made no mention about this being a new loan. I no longer wish to retain my home as I feel that the lender was aware of the discharge and it seems to me that since it was 4 months later when they proposed the modification that it was illegaly pursuing the discharged debt. Do I have a case to force the lender so they will void the modification and release me from title and financial responsibility ?

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